Cryptocurrency continues to gain mainstream acceptance, as PayPal announced that they have added Bitcoin, Ethereum, Bitcoin Cash, and Litecoin to its Venmo app. With a user base of 70 million, the move will certainly make it easier for people to buy crypto—but it’s also a volatile investment that’s taxed like property, so you’ll want to gauge the risk and tax burden before you dive in with both feet.
How it works
By adding cryptocurrency, Venmo joins its competitor Square, which added Bitcoin to its app in 2018. Users can buy or sell crypto, view cryptocurrency trends, and access in-app guides and videos about crypto. As with its peer-to-peer activity, crypto transactions will be public by default, so that users can “choose to share their crypto journey with their friends,” as PayPal puts it in their press release (personally, in keeping with previous Lifehacker advice, I like to keep most of my Venmo journeys private). Crypto on Venmo rolls out today for some users and will be available for all customers directly in the Venmo app within the next few weeks.
Is crypto actually a good investment?
It depends on your appetite for risk. There is no single, dominant cryptocurrency to bet on, and fluctuations in value are not for the faint of heart. But that’s also part of the appeal: people hear about double-digit percentage gain in value and think they’re missing out. And they might be. But at the same time, a double-digit drop is just as likely as a gain—in fact, it happened last weekend, as Bitcoin dropped 12.3% in value within 20 minutes, according to Crypto Briefing. In other words, you probably don’t want to rely on crypto for your retirement savings, but it can diversify your portfolio. Spend what you can afford to lose.
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You can’t avoid the IRS
If you were thinking of crypto as an “off the grid” investment option, the IRS is doing its best to disabuse you of that notion. As of the 2020 tax season, the IRS says it will crack down on people who don’t report crypto they’ve received, sold, or exchanged (merely purchasing virtual currency with cash doesn’t count, however, per E&Y). There’s even a specific question about it on line six of your Form 1040, where it’s hard to avoid.
For tax purposes, the IRS treats cryptocurrency as property instead of currency, which means that profits are subject to capital gains taxes when you convert it to cash or otherwise sell it. If you sell it within a year, the capital gains will be whichever tax bracket you fall under—which can be as high as 37% (otherwise, if you hold onto it for more than a year, the capital gains will be 0%, 15%, and 20%, based on your income). However, per bitcoin.com, crypto airdrops, awards, and giveaways are a little different, as they’re treated as taxable income.
At the very least, you’ll want to consider the tax implications before you invest (this Nerdwallet post lays it out pretty well), and keep thorough records of every transaction to save you trouble with the IRS later.
