Surely you’ve heard of cryptocurrencies, but do you know what they are and what they are use for?
Cryptocurrencies, like all other currencies, serve to make payments for services and/or goods, however these are digital currencies that are based on the blockchain, and are not regulated, do not belong to, nor are they issued by any state or bank. central. Its digital system is decentralized.
Transfers or payments are always registered on the network but completely anonymously. For example, it is possible to see that X transferred an amount to Y, but it is not possible to know the identity of X and Y.
How do cryptocurrencies work?
It is important from now on to make a distinction between cryptoassets and cryptocurrencies. Cryptoassets are digital representations of values that can be used to make payments. These involve different types of assets, cryptocurrencies being one of these types, as well as NFTs or Tokens.
It was in 2008 that the first and still one of the best known cryptocurrencies, Bitcoin, appeared.
The idea of this type of investment is the same as that of investing in the stock market: buy at the low moment to sell at the high moment and thus make a profit.
Blockchain
Blockchain is nothing less than the technology that underpins cryptocurrencies. It is a public database containing the history of all transactions carried out.
The term blockchain starts from the fact that the technology stores data in blocks (block) of information, which are connected to each other, forming a chain (chain).
It is made up of a cryptographic component and mathematical formulas that guarantee that the stored information cannot be tampered with, making it difficult, for example, for hackers to attack.
As the number of transactions increases, the blockchain increases as well. We can look at this technology as a chain of blocks, in which each stored information joins the previous information, making the system grow.
Mining
We cannot talk about Blockchain without talking about miners and the mining process.
Cryptocurrency mining is the process of validating and adding new transactions to the blockchain. This is responsible for putting more cryptocurrencies into circulation.
Miners, in turn, are the ones who validate transactions.
There are thousands of miners who, with their computers, when a transaction is placed in the ecosystem, try to solve the “problem” as quickly as possible, solving complex equations. The solution is found on the basis of trial and error, which requires a lot of computational power. When the process is finally validated, cryptocurrencies are created. This validation is called Proof of Work.
As a curiosity, each block is mined, on average, every 10 minutes.
Advantages and disadvantages of cryptocurrencies
If, on the one hand, investing in cryptocurrencies offers some advantages, on the other hand, the associated risks make us think and rethink the subject.
The fact that this system is decentralized can be a positive point, as transactions do not need to go through a central body, that is, through intermediaries, as with traditional currency. This means that no organization can determine the flow and value of currency, which makes it possible to keep it stable and secure. The ease of this type of transactions also becomes a big advantage.
Regarding the negative points, we can point out the problem of lack of knowledge. This is a market that requires some prior study, otherwise it could lead to errors and great losses.
Another of the disadvantages is related to the environmental impact. Cryptocurrency mining requires a lot of electricity and computational power. Bitcoin is one of the main culprits, as mining it requires advanced computers and a lot of energy. Even so, it is important to say that certain measures are already being imposed that aim to change this scenario.
The biggest disadvantage is the volatility of the system. In the cryptocurrency market, there are large fluctuations that can translate into both large gains and huge losses. The value of cryptocurrencies can, on the same day, increase by 100% and fall by 100%.
Cryptocurrencies in Portugal
Have you ever heard the following sentence: “Portugal is a tax haven for cryptocurrencies”?
It is likely that yes, because, until now, Portugal did not have any tax regime related to cryptocurrencies. There were no associated taxes of any kind. However, from now on, and with the approval of the State Budget for 2023, the scenario will undergo some changes. This is because Portugal decided to create a new tax regime for crypto assets, providing that capital gains are taxed at a rate of 28% when held for less than one year.
The creation of measures relating to cryptocurrencies also involves the issue of environmental impact and penalties are now proposed for mining activity.
From here it was determined that operations related to the issuance of cryptocurrencies, including mining, are subject to declaration, as part of the commercial and industrial activities covered by Category B of the IRS Code of Personal Income Tax.
Gains resulting from the sale of non-securities cryptocurrencies are considered capital gains and taxed under Category G of the IRS Code.
Therefore, if there is a profit from the sale of cryptocurrencies purchased less than a year ago, it is necessary to file a tax return. The rules also apply to NFTs which must also be declared. Capital gains held for a period equal to or greater than 365 days remain exempt from IRS.
Free transactions, such as cryptocurrency donations, are subject to Stamp Duty at the rate of 10%. If the transaction involves an onerous consideration, only the sale of cryptocurrencies will be taxed.
Despite the many positives of the digital currency, there are still many risks that can arise. To avoid or minimize losses, we advise you to, for example, create a diversified portfolio, that is, avoid investing and placing all your assets in a single asset.
