Cryptocurrency

Also called Digital currency

A digital asset recorded on a blockchain, a shared electronic ledger, that is not issued by a government and whose price is often highly volatile.

What it means

Cryptocurrencies are digital tokens tracked on decentralized networks rather than by a bank or central bank. Most produce no earnings, interest or dividends, so investors generally make money only if someone later pays a higher price, and lose money if the price falls. Prices have historically swung far more than stocks, including declines of more than half, and some tokens have become worthless.

Other risks include hacks, scams, lost passwords that make holdings unrecoverable, and the failure of exchanges. Crypto held on a platform is generally not protected by FDIC insurance, and SIPC typically does not cover it. The IRS treats cryptocurrency as property: selling it, trading it for another token, or spending it is a taxable event, with short- or long-term capital gains rules applying.

Example

Suppose someone buys $1,000 of a cryptocurrency and later uses it to buy a laptop when it is worth $1,500. Even though they never sold for dollars, they have a $500 taxable capital gain.

How it’s used

Speculating on price movements with money one can afford to lose
Sending value across borders or online
Holding a small, high-risk slice of a portfolio

Strengths and weaknesses

Strengths

Can be bought in small amounts and traded at any hour
Transfers can be fast and do not require a bank
Has had periods of large price gains

Weaknesses

Extreme volatility, with a real chance of large or total loss
Limited investor protections and exposure to fraud and hacks
Every sale, swap or purchase can create a taxable event to track

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.