LEVEL 2 - TAX SPECIALIST (HRB) - CRYPTO

What is a wallet?

A place to store crypto, online or offline.

Can you give an example of a non-virtual NFT?

A rare baseball card with limited copies.

What is a non-fungible token (NFT)?

A unique digital version of almost anything.

How are accidental and intentional forks handled differently?

Accidental forks are resolved by adding blocks, while intentional forks update the blockchain rules.

What is a store of value?

An asset that can be saved for the future without lowering the value.

How much were the two pizzas worth in dollars at the time?

Approximately 30 to 40 dollars.

Why is the energy consumption lower in Proof-of-stake?

Because it is more controlled and less competitive.

How are accidental forks resolved?

By adding blocks to one side or the other, and carrying forward the longer chain.

Convertible or open virtual currency...

Can be exchanged for Fiat/Real currency based on an agreed - upon value. The best known examples of this are bitcoin and Ether, both both of which are cryptocurrencies. The currency is known as Ether: the Blockchain is Ethereum. As part of the new digital asset designation, the IRS states that an ass With an equivalent value in Fiat currency, or one that acts as a substitute, for real currency, is considered Convertible, virtual currency.

A 2nd subtype of Digital Currency that is the virtual form of Fiat/Real Currency and backed by government is...

Central Bank Digital Currency (CBDC)

What causes intentional forks?

Changes in the blockchain software.

What are hard forks?

Creates a distinct separation in the blockchain.

What are stablecoins?

Cryptocurrencies that aim to maintain a stable value.

What are public keys?

Delivery addresses for coins or tokens.

What are tokens?

Digital assets that can be traded, bought or sold.

What are digital assets?

Digital representation of value on a secure ledger.

What are hard forks?

Distinct separation in the blockchain during software update.

How are public keys obtained?

Easily obtained through moving coins or tokens.

How is the winner determined in Proof-of-stake?

Either through highest-bidder format or random selection from stakers.

Digital Currency is any currency used exclusively in what form?

Electronic

What are intentional forks?

Forks that update the blockchain rules.

What are examples of a store of value?

Gold, silver, and fiat currency.

Currency is tangible or intangible property?

Intangible

What are soft forks?

Intentional forks that result in backward-compatible changes to the blockchain software.

What are hard forks?

Intentional forks that result in incompatible changes to the blockchain software.

What is the IRS?

Internal Revenue Service, the US government agency responsible for tax collection and enforcement.

What happens to the shorter chain in accidental forks?

It is abandoned, called orphaned or stale blocks.

What happens to the old data during a hard fork?

It isn't recognized by the system and won't work anymore.

When was Bitcoin launched?

January 2009.

Are soft forks secure?

Less secure due to inconsistent chain reading.

What are some examples of stablecoins?

Metagold (tied to a commodity like gold) and Tether USD (tied to the US dollar).

What is Proof-of-work?

Mining process using energy and expensive computer systems.

What are coins?

Native units of a blockchain used for trading, storing value, and making purchases. Can be mined.

What can forks create?

New spin-off currencies, such as Bitcoin Cash or Bitcoin Gold.

Are tokens native to the blockchain they are on?

No, tokens are not native to the blockchain.

Can tokens be mined?

No, tokens cannot be mined.

What are the 2 Virtual Currency sub-types?

Non-convertible or Convertible.

How do soft forks work?

Older nodes recognize data, newer nodes don't.

How does Proof-of-stake differ from Proof-of-work?

Proof-of-stake is less energy-intensive and uses bidding or staking instead of mining.

How does scarcity create value for NFTs?

Scarcity of NFTs can increase their value.

How are spin-off currencies traded?

Separately from the original currency, with their own unique blockchain.

What are orphaned or stale blocks?

Shorter chains that are abandoned in accidental forks.

What happens during a hard fork?

Software is updated and all nodes are changed to the new version.

What is mining?

Solving equations and verifying transactions to unlock new blocks on the chain and generate new coins.

What are forks in the blockchain?

Splits in the blockchain.

What are users called in Proof-of-stake?

Stakers.

What is an example of a virtual NFT?

The first ever tweet sold as a verified NFT.

Where are spin-off currencies forked from?

The main blockchain of the original currency, such as Bitcoin.

What happens in accidental forks when the longer chain is carried forward?

The shorter chain is abandoned, called orphaned or stale blocks.

How do investors use crypto as a store of value?

They buy it to hold for future value, not for daily use.

What do miners do in Proof-of-work?

They trade energy for coins by solving blocks.

Why are hard forks used?

To fix a security issue or add functionality.

What is the purpose of intentional forks?

To make changes to the blockchain software.

Why do stablecoins try to alleviate value swings?

To prevent users from earning or losing large amounts of money in short periods of time.

What is the purpose of tokens?

To store value and facilitate transactions on a blockchain.

What causes accidental forks?

Two blocks being mined at the same time.

What was the first known purchase made with Bitcoin?

Two pizzas for $10,000 bitcoins.

Virtual Currency does not have legal tender status in the...

US

What do users need to do during a hard fork?

Update their software to use the new chain.

What are soft forks?

Updates without creating a new chain.

What is Proof-of-stake?

Users bid or stake crypto to solve blocks.

Mining:

Using expensive computer "rigs" and software, miners earn coins when they're rig computes the solution for equations the blockchain system generates. if they are the first to solve the equation, they add blocks "typically one megabyte each" to the chain, and the system rewards them with a certain amount of crypto. they have mined that reward. At the same time, the miners are securing the blockchain by verifying the transactions included in their new block. when a miner assembles a new block which is accepted by other users, that minor gets a block reward, generally more crypto. the miners also receive fees (paid in crypto) from each transaction contained in the new block they added.

Can both branches of a hard fork continue to be used?

Yes, if users continue to support both chains.

The IRS definition of virtual currency is...

a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value

A crypto blockchain can be defined as:

a shared database that provides a trackable, protected, and verifiable Trace for all transactions.

The developers of any new crypto determine the

availability when the original blockchain structure is developed.

Virtual currency is largely unregulated, usually controlled by its developers, not backed by a...

central bank or government.

public Ledger: a transparent and verified record of transactions

designed to keep all data secure.

To keep virtual currency safe and secure,

developers generally use blockchain technology.

In 2022, the IRS began referring to virtual currency as a...

digital asset

Non-convertible or closed currency

game currency, like candy crush gold. Closed currencies like this do not have an actual value outside of the game, and generally can't be transferred to another game. They can only be spent or trading in-game.

Cash is fiat/real currency, gov. issued & not backed by commodities like

gold or silver

Blockchain security:

individual blocks are time stamped and encrypted, providing a trackable, protected, and verifiable Trace for all transactions. each block in the chain contains data, in the case of bitcoin, there are an average of 2,000 transactions recorded in each block. Since blockchains are shared across multiple networks, a user who altered their copy would not be able to steal anyone else's currency, because their database wouldn't match everyone else's. because the blockchain is so difficult to hack although not completely impossible, most crypto attacks are directed at crypto exchanges and individual user wallets. Although block chains were first theorized in 1991 and are used in a variety of industries, they didn't become widely known until the 2010s with the growth of cryptocurrency.

For most currencies, mining is the only way to generate

new crypto coins after any initial coin offerings also known as ICOs

Existing coins can be bought, traded for goods or paid as wages. taxpayers can receive coins as a gift or inheritance, and some companies use them as incentives.

once the taxpayer has the coins, they can sell them, trade them, pay others with them, give them away, or hang on to them. the tax treatment of crypto varies depending on how it was received and how the taxpayer dispersed it, if they do at all.

Altcoins: Alternative coins

or crypto other than Bitcoin (sometimes used to mean crypto other than Bitcoin and ether).

overtime, the rewards for adding blocks have decreased,

slowing the rate of mining. current estimates are that the last coins will be mined in 2140.

Hashing: Taking an input string and giving back an output of fixed length using an algorithm. Bitcoin uses the sha-256 algorithm

so any combo of characters reads back as 64 characters of text

a blockchain is a shared database that collects data in groups or blocks, then strings them together, hence the chain.

the database utilizes a variety of cryptography techniques to secure the data, a cryptographically secured distributed ledger, as it were. shortened to give the name cryptocurrency.

When can a new currency be created from an existing blockchain? when a hard Fork splits a blockchain and creates a new separate chain. when an existing chain is split by a hard fork and both branches are supported by users

the new Branch becomes its own separate currency.

Smart contracts: Computerized self-executing contracts. by including the parties involved and the terms in the code and broadcasting it to the blockchain

the smart contract can be executed at any time in the future and creates an extra level of security as users cannot renege. the transactions are easily traceable and irreversible.

Virtual Currency possesses value for the same reason as the dollar bill...

the users of the currency have agreed that it has that value.

One sub type of digital currency is

virtual currency