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12. Cryptocurrency – Taxation

At the moment Bitcoin may not be on the Tax Office’s radar in your country. Don’t bank on it remaining that way too long. Bitcoin is still experimental and new improvements are happening all the time.

As it increases it’s user base, it’s only a matter of time before all Tax Offices have legislation to enforce taxes of Bitcoin transactions. Remember all transactions are recorded and displayed openly, right back to day one. That could create a hefty tax bill further down the track. I’d think about paying the correct taxes today.

A handy trick for any business is to extract an amount to be withheld for taxes but take 20% of it and invest it in p2p funding finance. By the time the tax is due, half of the funds will be paid back and if the business cannor meet the other 10%, a payment scheme arranged with the Tax office will at worst cost half the persentage return you’ll earn on the crowd funding finance. We’ll be looking more into p2p funding after the crypto-currency topic.

The last time I searched the news, the major Australian banks were looking at adopting Blockchain security and the Commonwealth Bank was reviewing trading in Bitcoin. In Europe, several big banks are currently setting up for Bitcoin trading. It’s important to remember cybercurrencies effective shut the banks out, so the fact that banks are no longer refusing to acknowledge it, means it’s only a matter of time before it is accepted. Once a few major banks accept cybercurrency trading, it will open a floodgate of competition. Even if they try to invent their own altcurrency, it will still have to be compatible with Bitcoin, which is already well established.

Just a question that might be worth looking into; what would happen if you convert crypto-currency into a high value currency (e.g. Sterling or US dollars) then bring it back home to Australia or New Zealand when the exchange rates are favorable? The increase could offset some of the tax, if the transfer fees are not too high.

11. Cryptocurrency – Privacy

Because all Bitcoins transactions are visible, one of the ways it is proofed against fraud and manipulation, you need to take some effort to protect your privacy with Bitcoin. Because all transactions are stored publicly on the network, they show the cyber address, generated by your wallet and the balance of your Bitcoin account. The cyber address does not give away your real address until the purchase take place and even then, only to the other party in the transaction, not to anyone else on line. However anyone obtaining this address can see all the transaction related to that address. For this reason you should only use a Bitcoin address only once.

To protect your privacy, you should use a new Bitcoin address each time you receive a new payment. Additionally, you can use multiple wallets for different purposes. Doing so allows you to isolate each of your transactions in such a way that it is not possible to associate them all together. People who send you money cannot see what other Bitcoin addresses you own and what you do with them. This is probably the most important advice you should keep in mind.

Publishing a Bitcoin address on any public space such as a website or social network is not a good idea when it comes to privacy. If you choose to do so, always remember that if you move any funds with this address to one of your other addresses, they too will be publicly tainted by the history of your public address. Additionally, you might also want to be careful not to publish information about your transactions and purchases that could allow someone to identify your Bitcoin addresses.

Because Bitcoin operates on a peer to peer network, you IP address can be read with any transaction. There are ways to trace an IP address back to a physical address, so it’s a good idea to conceal your IP address with a program like Tor ( http://www.torproject.org ).

Another method of concealing your identity is using a mixing service. This is a deceptive and misleading method that is considered as akin to tax evasion in some countries. Also the mixing organisation has all your information, so you need to trust them and hope they have sufficient cyber security in force.

10. Crypyocurrency – Risk and Volatility

It pays to remember that Bitcoin and crypto-currency is in it’s infancy. The value of a Bitcoin is highly volatile and is highly unpredictable over the short term, so it should not be regarded as a way of saving money. Only try it out with money you can afford to lose. Personally I believe it will evolve to the point where financial control is wrested away from the banks, governments and a clutch of super rich with the power to manipulate the market. Like all investments, anyone getting on the ride early could reap the benefits as it grows. However, we are breaking totally new ground here. It is also likely that cryptocurrency could out perform fiat currency and be a lousy investment but useful only for short time transactions as an “on the spot” measure of value, rather than an investment instrument. For all we know, it could have passed it’s investment peak now. For my money, there are better investments that conserve the value of your hard won savings.

Initially the concept of Bitcoin took off and other cloned versions vied for leadership. It was viewed as shady and branded as a way crime would launder money, in it’s early days. Banks refused to recognise it, effectively making it valueless in the real world. Today several banks are looking at participating in Bitcoin. These ups and downs in perception have reflected in the price of a Bitcoin.

Recently several European and Australian Banks have quietly begun to purchase Bitcoins. The Commonwsealth Bank of Australia is looking into Bitcoin at the moment.

I believe that it’s only a matter of time and crypto currency will take over from the banks, leaving them to be expensive safe deposit houses. The world needs a universal currency and nationalistic pride will never accept any one currency. The answer is a cryptocurrency like Bitcoin. Currently we lose millions in transfer fees to transact overseas. Why? We’re not loading gold onto ships any more; it’s purely digital data these days (the price of an international, micro seconds long, phone call)  but we are still paying the fees fixed in the pre-computing days when it was shipped in a flotilla with armed escort vessels. With Bitcoin it will cost no extra to transact at home or overseas. The banks require staff to do this, so they can never compete with Bitcoin.

The important consideration is, there is a maximum number of Bitcoins. There can only be 21 Million Bitcoins. Unlike currency, no-one can make any more. Over time as more and more businesses come to accept Bitcoin, the demand will increase and being capped at 21 million means the value of Bitcoin should rise proportional to the demand. If the same happened with the US Dollar, for example, the Federal Reserve could print more money which would drop the value of the dollar. No-one can do this with Bitcoin.

As in all digital matters, with time any system becomes open to vulnerabilities, so you need to keep your software up to date. I would not suggest you transact in Bitcoin on a system using Windows XP, Windows 7 or Ubuntu 13.04 Linux. These operating systems are no longer supported for security updates and would invite hackers to steal your wallet. If you prefer these old stalwart systems, transact using a smartphone with updates and store your stash in a cold store,  hardware wallet that is removed from your system, the moment the transaction is complete.

9. Cryptocurrency – Transactions

It is important to note that Bitcoin transactions are not reversible. A purchase made with Bitcoin is not like one made with PayPal. Make sure you know who you are dealing with. The only way to get your “money” back is if the other party agrees to refund it. There are some safeguards in the Blockchain. It can detect typos and will not let you send Bitcoin to an invalid address. It’s still early days in crypto currency so, it’s highly probable that in the near future, more checks and balances will evolve.

Transactions in Bitcoin don’t start out as irreversible. They generate an identicle code at both the seller and the buyer, using a formula. For the transaction to take place both codes have to be idendtical. A rating is also transmitted that indicates the trustworthiness of the two parties. The codes are then used to log a transaction key which is used to label and store the transaction. As other transactions are processed, they are grouped together to form a block of transactions. This block is added to the ledger, which records every transaction, right back to day 1 when the first Bitcoin was formed. These may take anywhere from a few seconds to 90 minutes. Transactions that are small, are unusual in some way or pay a too low fee, take longer to process. The trust table is shown below with the codes and their meanings.

So you are aware of the risk, a confirmation score is sent back with each transaction. These scores are based on the history of the user you are dealing with, similar to a rating for buyers and sellers on an auction website. Below is the table of confirmations and their translations. They vary somewhat depending on the type of wallet you use.

Confirmations Lightweight wallets Bitcoin Core
0 Only safe if you trust the person paying you
1 Somewhat reliable Mostly reliable
3 Mostly reliable Highly reliable
6 Minimum recommendation for high-value bitcoin transfers
30 Recommendation during emergencies to allow human intervention

 

Bitcoin has a multi signature capability for businesses. In cases where several people need to have access to the business funds, Bitcoin has the ability to allow multiple signatures so the transaction does not validate until say 3 of the 5 trustees have signed.