Let’s first make sure we’re on the same page when it comes to crypto tax prep. This is how the IRS classifies cryptocurrency: It’s a digital currency or a “digital representation of value.” You can’t see it, hold it in your hand, or put it in your wallet. It’s been in use for over a decade and has grown in popularity over the last few years. Instead of using a bank to create, transfer, and exchange funds, cryptocurrency employs a distributed and encrypted blockchain network to process transactions. No bank or government authority controls it, as they do with traditional currencies. Cryptocurrency units are called coins, even though there’s no physical coin. You store coins in a digital wallet or use an exchange or brokerage. A few of the major exchange and brokerage providers are Binance, Coinbase, Kraken, and eToro. Bitcoin was the first cryptocurrency—we have a guide on how to buy, sell, and manage it—and it remains the most popular. It’s been joined by Ethereum, Litecoin, and Dogecoin, among others. Cryptocurrency can be used to pay for goods or services, as an investment, or simply to exchange funds with someone else, whether for different cryptocurrencies or traditional currency. Transactions are recorded in an anonymized blockchain, which can be thought of as a digitized public ledger.
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