Cryptocurrency basics- digital asset terms.
Fork- a change or split occurring to a blockchains protocol. The blockchain is historically connected to the original blockchain, it is simply going in a New direction, much like a fork in the road.
Soft fork- is a non-taxable event, a soft fork upgrade that brings new features to the blockchain the upgrade is made at the programming level. No new tokens or issued.
Hard fork- occurs when there is a permanent split in a blockchain. The split occurs when changes to the code are so drastic that new blockchains require new rules and is no longer compatible with the original blockchain such as a change in code that creates two paths. 1.) path new blockchain 2.) path original blockchain.
Essentially, a hard fork creates an entirely new digital asset. An example of this would be Bitcoin hard fork with the creation of Bitcoin gold or Bitcoin cash.
This usually result in the creation of the new digital asset on a new distributed ledger in addition to legacy digital asset on the legacy digital ledger. If your digital asset went through a hard fork but you didn't receive any digital assets, whether through a airdrop (distribution of digital asset to multiple taxpayer distributor ledger address) or some other kind of transfer you don't have taxable income.
No income when soft fork occurs.
Soft fork occur when a distributed ledger undergoes a protocol change that does not result in a diversion of The ledger and does not result in the creation of a new digital asset.
Airdrop- means of distributing units of digital assets to the distributed ledger address of multiple taxpayers.
An airdrop occur when a new digital asset token is deposited directly into user wallet. Also may occur when digital asset has a hard fork.
To avoid scams a crypto investor should never connect their wallet to a phishing website or provide their secret phrase or keys to claim an airdrop.
If hard fork is followed by airdrop you receive a new digital asset, you will have taxable income the taxable year you received those digital assets.
Staking- proof of work, proof of staking are methods to oversee the activities on an underlying blockchain Network. Each block chain has a specific validation protocol and those that utilize proof of stake create coins through staking. A popular alternative that increase speed and efficiency while reducing costs. Staking allows stakeholders to earn digital assets rewards through staking locking up their digital assets to validate transactions investors who State cannot trade or sell the stake unit for a holding/vesting period.
Mining-those who utilize proof of work create new coins through mining. Mining requires specialized equipment and vast amount of energy. Miners compete to solve complex math problems and earn the underlying digital asset for their efforts.
Non fungible tokens (nft)- the first nft sold by a major auction house was a collage of pictures by an artist known as "beeple." Nfts are most commonly digital pieces of art, music, video game items, videos or collectibles (anything digital) that are toted as one of a kind asset to be traded via blockchain. Investors can buy and sell nfts are usually Capital asset, just like other digital assets nfts are created to sell in a marketplace or bought and sold by investors.
Decentralization- digital assets are decentralized, that is, they are not controlled by a single entity such as a central bank or government.
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