Blockchain Basics, Part 3
A Guide by Crypto Witch Club
A REFRESH …
First, let’s review how how blockchain relates to crypto and NFTs!
A blockchain is a growing list of records known blocks. Each block contains information and together form a chain that cannot be altered or corrupted — think of it like a Google sheet with the edit history on.
Now imagine blockchain as train tracks. These train tracks are the foundation on which cryptocurrency and NFTs (the trains) run on. The blockchain provides security (through cryptography or similar protocols) and infrastructure that keeps the trains — NFTs and cryptocurrency — safe, without needing to be governed by a central figure or bank.
WALLETS & CRYPTO
A cryptocurrency wallet is a physical (hardware) or online (software) device that stores your public and private keys. These keys give you access to your cryptocurrency — which lives on the blockchain. Without your private key, your cryptocurrency cannot be accessed. If you lose your wallet and someone finds it but doesn’t have the private key — they can’t access it. (You can restore it later on a new device using your previously set recovery phrase.)
Holding your crypto is a wallet means you have full custody and own your funds. If you hold your crypto on the exchange where you purchased it from, it doesn’t fully belong to you — as it’s in the exchange’s custody. That means if the exchange goes down, gets hacked, or if you get locked or blocked from your account — you can lose your cryptocurrency.
On a personal level: about 60% of our cryptocurrency is held in wallets. Another 30% or so is staked or in liquidity pools on DeFi exchanges, and 10% live in our trading balances on exchanges.
TAXES AND CRYPTO
Purchasing crypto itself is not a taxable event but selling, staking, earning interest, and receiving crypto as a gift are all considered taxable events in the eyes of the IRS
Crypto is usually taxed at the same as stocks and other capital gains — unless you received it as income. If you hold your crypto for less than a year, you will be taxed at a short-term rate, which is higher than if you hold long-term (over a year). We suggest using a crypto tax service to assist in calculating what you owe, like CoinTracker to ensure you’re accurately reporting your crypto and NFT taxes.
You may owe crypto taxes if …
As capital gains …
Receive crypto as a gift and then sell it, making a profit
Exchange your crypto for US dollars
Spend your crypto on goods or services
As income…
Being paid in crypto in exchange for goods and/or services
Airdrop
Mining crypto
Staking or similar rewards
The following info pertains to US witches only. Make sure to check your own country’s rules pertaining to cryptocurrency + taxes.
THE ENVIRONMENT AND CRYPTO
You can learn more about crypto and the environment at our resources here and here. Below, find 3 facts that help demystify crypto and the environment.
Fact #1: Energy usage within the blockchain space largely depends on a cryptocurrency’s protocol. For example, a proof-of-work protocol uses far more energy than a proof-of-stake protocol. According to The Solana Foundation, a Solana transaction uses less energy per transaction than 2 google searches and 24 times less energy than charging your phone.
Fact #2: 70% of Bitcoin — a proof-of-work cryptocurrency — is mined using some form of renewable energy, according to Cambridge University’s Bitcoin Consumption Index.
Fact #3: Cryptocurrency can be environmentally friendly. Blockchain Polygon is carbon neutral while Algorand is carbon negative through a partnership with ClimateTrade.
Need more? We don’t blame you.
Download our FREE Blockchain Basics Guide on our website to read the next segments or stay tuned here for the third installment of Blockchain Basics from Crypto Witch Club.