Forks 101: What Every Investor Should Know

If you’re a crypto investor, you should most certainly know about blockchain forks and their impact on the crypto market. Just like news of changes happening in any random stock traded on Wall Street, news of an impending fork can cause a bit of a raucous in the crypto world (see, I used “raucous” because I’m a Gen-Xer and can get away with it…sort of).

First off, there are two types of forks: A soft fork and a hard fork. A soft fork is backward-compatible software change that follows new rules set forth while still adhering to the old (Confused yet? Just wait). A hard fork is an entirely NEW set of rules implemented that requires all users to upgrade to the latest version. Kind of like Apple forcing you to upgrade to the newest iOS – few are happy about it, and you must make a choice between annoying notifications and getting used to the unnecessary changes those Apple f*ckers who take pleasure in gaslighting made (okay, it’s really not that bad and yes, I’m a little bitter about the last one).

When a fork is executed, a new coin is created out of the “new rules” stemming from the updates. Throughout history, there have been MANY forks in the Bitcoin blockchain, creating several hundred coins throughout the years, most recently Bitcoin Cash and Bitcoin Gold. Depending on the buzz, Bitcoin will usually spike, then dip during the fork adjustment period, but then increase in significant value over time. Why dip? Fear of the unknown, but as Omar from Crypt0sNews was so nice to explain to me, Bitcoin is based on mathematical equations and history shows each dip is followed by a surge in price once the fervor subsides and traders’ confidence is up again (which doesn’t take long).

So the next biggie to look out for at the time of this writing: SegWit2x Hard Fork (around November 16th). I know, sounds like a name of a horrible video game at best. The first SegWit (short for Segregated Witness) was implemented back in August of this year, creating Bitcoin Cash. In short, Bitcoin Core developers felt the need for the software updates due to congestion on the blockchain, slowing down transaction times. This *kind of* helped, but the size of the blocks on the blockchain remained at their original size of 1MB, which was fine at Bitcoin’s inception but not unlike LA freeways, more and more traffic demands larger lanes, so SegWit2x is promising to fix that problem by doubling the block size (now if there could only be an LA freeway upgrade…).

Since the blockchain is a decentralized, distributed ledger that is always in play and never shuts down, think of airplane maintenance in mid-flight. Critics say the fork is coming too soon after SegWit implementation, but again, only time will tell. The main concern is that there will be yet another coin split – Bitcoin Core (or the Legacy Bitcoin) and the SegWit2x version, and there may be confusion as to which is the authentic Bitcoin. The best thing to do to according to CoinTelegraph.com is to transfer your BTC onto your own private key like a Trezor or Ledger Nano until the storm passes.

Crypto, Real Estate, and Capital Gains

Capital Gains: Taxes on profits from the sale of certain types of investments by a company or individual.

Another frequent question we are asked about is the question of capital gains, and the answer is YES. If you are a savvy investor, whether it’s property or other investments, you can always expect that the IRS will have their hands in your pockets (or at least die trying…wait, who am I kidding? The IRS will be the only thing left besides Keith Richards after the apocalypse).

A great article in thebalance.com goes into detail as to how Uncle Sam views crypto and BTC. Essentially, the IRS views cryptocurrency as property, and taxes it based on the capital gains formulas. Long-term holds (more than one year) aren’t taxed if you fall into the 10-15% tax bracket, but taxpayers in the 25, 28, 33 & 35% tax brackets are subject to 15% CGT. Short-term capital gains rates are taxed at the same rate as ordinary income (20%) and a 3.8% tax on net investment income for single taxpayers with an average income greater than $200K (more on taxpolicycenter.com). I don’t know about you, but it makes my head hurt already.

Now, what if you’re using crypto to buy real estate? It all depends on what you plan to do with it. Hopefully you’ve held onto your Bitcoin long enough to avoid the aforementioned happy fun times and now you’re ready to convert some of your investments into tangible assets (insert shameless plug here). So, if you DO fall within the long-term and lower tax bracket guidelines, you’re good on the BTC capital gains and according to bankrate.com, you’re also able to avoid CGT if you follow these guidelines:

  • You must be selling your principle residence.
  • You must have lived in it for at least two of the five years before you sell.

Of course, there are separate rules for married couples (those guys always get the breaks) and special rules for military personnel. Technically, you could repeat this cycle every two years. This, of course, doesn’t apply to second homes or investment properties.

Other ways to avoid are of course the old 1031 Exchanges, charitable donations, tax shelters, but my advice would be to find one of those rare CPAs who specialize in crypto anyway (and if you find one, let us know and we’ll add them to our preferred vendors!).