Beyond Bitcoin: What You Need To Know about Dogecoin and Other Cryptocurrencies

Bitcoin has been around as an extremely volatile but potentially lucrative investment or currency alternative for a decade now, and with Bitcoin surging in value lately and other cryptocurrencies making noise, you may be wondering what they are all about.

In this article

What is a cryptocurrency?

Let’s start with the basics. A cryptocurrency is a digital item that people can use to exchange for goods and services, if both parties are willing to accept it. If you have some cryptocurrency and another person is willing to accept that as payment for a good or service, then you can make that exchange. Often, if people are willing to accept a cryptocurrency in that way, a broker will be willing to exchange money directly for cryptocurrency, which is how people make money buying and selling it.

There are a couple of key features that most cryptocurrencies have. Every single piece of cryptocurrency is registered with a central ledger, which anonymously specifies who the rightful owner is. The owner is usually identified with a hidden passcode that they keep, which identifies them as the owner of a certain amount of cryptocurrency. When you buy some cryptocurrency, the ledger marks that currency with your private passcode. When you sell it, the ledger marks someone else as the new owner. These transactions are usually facilitated by an online cryptocurrency broker like Coinbase.

The value of a cryptocurrency is wholly based on what people are willing to pay for them. They’re simply an agreed-upon means of exchange between two people or groups. If all parties agree that the cryptocurrency has a certain value, then it can be used to exchange things between those parties.

How do you ‘hold’ cryptocurrency?

Cryptocurrency is held in a digital wallet. This digital wallet is protected by a password that only you know and contains a secure private key that identifies you and allows you to access any cryptocurrency you own.

Think of the private key as being like your finger, which then provides a “fingerprint” to the cryptocurrency ledger identifying you. You keep that private key safe by having a preferably complex password that only you know, so that others have no chance to access your private key.

There are several desktop programs that work as a cryptocurrency wallet. You keep these on your computer (or, ideally, on a secure external device, like a thumb drive). You can also keep your wallet on a secure third-party service like Coinbase.

What is Bitcoin?

Bitcoin is a specific type of cryptocurrency, the first one to become well known and popular. Like most other cryptocurrencies, it has a central ledger that marks the owner of every single Bitcoin (or fraction of a Bitcoin). You have a hidden passcode that identifies you as the owner that only you can unlock. A digital “thumbprint” of your passcode is used in the ledger to identify you, so that it is publicly known that the person with that digital “thumbprint” owns these specific bitcoins.

One key feature of Bitcoin is that there is a finite number of them. New Bitcoins are created or “mined” at an increasingly slow rate and eventually there will be no more produced.

What is Dogecoin?

Dogecoin is very similar to Bitcoin, but is a bit more lighthearted, as it is often represented with a picture of a cute dog. Functionally, it’s similar to Bitcoin, but unlike Bitcoin, there’s an infinite number of Dogecoin, as 10,000 new ones are created or mined every minute. Dogecoin is intentionally designed to have a much lower value than Bitcoin, making it excellent for things like tipping. However, with big fluctuations in the value of Dogecoin, some people seek to invest in it by buying and selling large quantities of Dogecoin.

Why are there so many different cryptocurrencies?

While Bitcoin and Dogecoin are among the most well-known cryptocurrencies, there are many others. Why? One reason is that it’s relatively easy for a few well-trained programmers to create a new one, as most of the computer code needed to create one is easily available. Because of that, many people view a new cryptocurrency as a potential opportunity to get rich quickly, as they can “mine” a bunch of coins for themselves, and if they can just convince others to accept them as a medium of exchange, they’ve just created money.

Are cryptocurrencies a good investment?

All cryptocurrencies are very volatile investments. Well-known ones, particularly Bitcoin, are very likely to retain some value as so many people have agreed to use Bitcoin as a medium of exchange. However, the value of even Bitcoin fluctuates wildly, even from day to day. Lesser known cryptocurrencies can see their value drop to virtually nothing, as there aren’t nearly as many people who are using it as a means of exchange.

In short, don’t invest in any cryptocurrency unless you are in a secure enough position that you can afford to completely lose any money you invested. Highly volatile investments like cryptocurrency, for most people, should be treated as entertainment spending, akin to spending money at a casino.

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What Are the Different Types of Taxes?

Whether you’re a newbie in the workforce or a seasoned retiree looking to do some estate planning, taxes can be complicated. With terms like “tax brackets” and “deductions,” or the differences between income vs. payroll taxes and short-term vs. long-term capital gains, you’re joining hundreds of millions of Americans who have had to figure out the confusing world of the U.S. tax code.

At a high level, taxes are involuntary fees imposed on individuals or corporations by a government entity. The collected fees are used to fund a range of government activities, including but not limited to schools, maintaining roads, health programs, as well as defense measures.

For individuals, taxes can have a profound effect on your life, influencing decisions on marriage, employment, buying a home, investing, healthcare, charity, retiring, and leaving a will. Therefore, even if you have a smart accountant, it’s important to get up to speed on the tax code.

Different Types of Taxes to Know

Here’s an incomplete but detailed look at the different types of taxes that can be levied and the ways in which they’re typically calculated and imposed.

Income Tax

The federal government collects income tax from people and businesses, based upon the amount of money that was earned during a particular year. There can also be other income taxes levied, such as state or local ones. Specifics of how to calculate this type of tax can change as tax laws do.

In the U.S, about 200 million Americans file tax forms with the Internal Revenue Service by April 15 each year. The amount of income tax owed will depend upon the person’s tax bracket and it will typically go up as a person’s income does. That’s because, in the U.S., there is a progressive tax system for federal income tax, meaning individuals who earn more are taxed more.

There are currently seven different federal tax brackets. To find out what bracket applies, a taxpayer can look at the current IRS 2021 tax bracket chart . The amount owed will also depend on filing categories like single; head of household; married, filing jointly; and married, filing separately.

Deductions and credits can help to lower the amount of income tax owed. And if a federal or state government charges you more than you actually owed, you’ll receive a tax refund.

SoFi’s Income Tax Help Center

SoFi’s 2021 income tax help center includes information about the following in order to help taxpayers:

•  How to prepare with a meeting with an accountant
•  The impact that COVID-19 could have on someone’s taxes
•  How to file for an extension and much more

Property Tax

Property taxes are charged by local governments and they are one of the costs associated with owning a home.

The amount owed varies by location and is calculated as a percentage of a property’s value. The funds typically help to fund the local government, as well as public schools, libraries, public works, parks, and so forth.

Property taxes are considered to be an ad valorem tax because they are based on the assessed value of the property.

In fact, property taxes are the most common type of an ad valorem tax. Another ad valorem application is the import duty tax where the amount due is based on the value of goods being imported from another country.

Payroll Tax

Employers withhold a percentage of money from employees’ pay and then forward those funds to the government. The amount being withheld will vary, based on a particular employee’s wages, with federal payroll taxes being used to fund Medicare and Social Security.

There are limits on the portion of income that would be taxed. For example, in 2020, a person’s income that exceeds $137,700 is not subject to Social Security tax.

Because this tax is applied uniformly, rather than based on income throughout the system, payroll taxes are considered to be a regressive tax.

Inheritance/Estate Tax

These are actually two different types of taxes. The first—the inheritance tax—can apply in certain states when someone inherits money or property from a deceased person’s estate. The beneficiary would be responsible for paying this tax if they live in one of several different states where this tax exists AND the inheritance is large enough.

The federal government does not have an inheritance tax. Instead, there is a federal estate tax that is calculated on the deceased person’s money and property and it’s paid out from the assets of the deceased before anything is distributed to their beneficiaries.

There can be exemptions to these taxes and, in general, people who inherit from someone they aren’t related to can anticipate higher rates of tax.

Regressive, Progressive, and Proportional Taxes

These are the three main categories of tax structures in the U.S. (two of which have already been referenced in this post).

Here are definitions that include how they impact people with varying levels of income.

What’s a Regressive Tax?

Because this tax is uniformly applied, regardless of income, it takes a bigger percentage from people who earn less and a smaller percentage from people who earn more.

As a high-level example, a $500 tax would be 1% of someone’s income if they earned $50,000; it would only be half of one percent if someone earned $100,000, and so on. Examples of regressive taxes include state sales taxes and user fees.

What’s a Progressive Tax?

This kind of tax works differently, with people who are earning more money having a higher rate of taxation. In other words, this tax (such as an income tax) is based on income.

This system is designed to allow people who have a lower income to have enough money for cost of living expenses.

What’s Proportional Tax?

This is another way of saying “flat tax.” No matter what someone’s income might be, they would pay the same proportion. This is a form of a regressive tax and proportional taxes are more common at the state level and less common at the federal level.

Capital Gains Tax

Next up: capital gains tax that an investor may be responsible for paying when having stocks in an investment portfolio. This can happen, for example, if they sell a stock that has appreciated in value over the purchase price.

The difference in the increased value from purchase to sale is called “capital gains” and, typically, there would be a capital gains tax levied.

An exception can be when an investor sells increased-in-value stocks through a tax-deferred retirement investment inside of the account. Meanwhile, dividends are taxed as income, not as capital gains.

It’s also important for investors to know the difference between short-term and long-term capital gains taxes. In the U.S. tax code, short-term is one year or less, while long-term is anything longer. In 2020, the federal tax rate on gains made by short-term investments ranged from 10% to 37%. For long-term investment gains, it was significantly lower at either 0%, 15% or 20%.

Tips For Tax-Efficient Investing

Tips for tax efficient investing can include to select certain investment vehicles, such as:

•  Exchange-traded funds (ETFs): These are baskets of securities that trade like a stock. They’re tax efficient because they typically track an underlying index, meaning that while they allow investors to have broad exposure, individual securities are bought and sold less frequently, creating fewer events that will likely result in capital gains taxes.
•  Index mutual funds: These tend to be more tax efficient than actively managed funds for reasons similar to ETFs.
•  Treasury bonds: There are no state income taxes levied on earned interest.
•  Municipal bonds: Interest, in general, is exempted from federal taxes; if the investor lives within the municipality where these local government bonds are issued, they can typically be exempt from state and local taxes, as well.

VAT Consumption Tax

In the U.S., we pay a regressive form of tax, a sales tax, on many items that are purchased. In Europe, the system works differently. A VAT tax is a form of consumption tax that’s due upon a purchase, calculated on the difference between the sales price and what it cost to create that product or service. In other words, it’s based on the item’s added value.

Here’s one big difference between a sales tax and a VAT tax: the first is charged at the final part of the sales transaction. VAT, on the other hand, is calculated throughout each supply chain step and then built into the final purchase price.

This leads to another difference. Sales taxes are added onto the purchase price that’s listed; VAT contains those fees within the price and so nothing extra is added onto the price tag that a buyer would see.

The Takeaway

This isn’t a comprehensive list of all tax types but hopefully it provides a broad answer to questions like “What is a tax?” and “What types of taxes are there?” And hopefully it demystifies some questions you might have had about all the different tax items on a receipt or paystub.

SoFi Money is a cash management account that can be set up for direct deposits, which can include your income tax refund. When filing tax forms, you’ll just need to indicate where you want the refund to go.

Setting up a direct deposit for payroll is also easy. You just download and sign a pre-filled form and then give it to your employee’s human resources department. Then, watch for the direct deposit to come into your SoFi Money account. This can take two to four weeks.

Set up direct deposit with SoFi Money today.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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What if You Fear Missing Out on a Hot Investment?

If you’re like me, stories of people turning small amounts into millions during the recent Gamestop investment surge may have left you with a feeling of envy. If you could have only gotten in on the ground floor. Or perhaps you wondered if it wasn’t too late to jump on. Maybe you even bought in when GameStop shares were at $100, only to watch a subsequent spike and rapid drop over the following days.

In all of those cases, there’s one common element: a sense that something big was going on, that you weren’t a part of it, and that you somehow missed out on it. There’s a desire to jump in, to be a part of it, even if you know in the back of your head that it might not be a great idea.

It’s the fear of missing out. It’s real, and it’s about more than just investments.

In this article

What is FOMO (fear of missing out)?

The fear of missing out is something we’ve all felt at some time or another. You hear that something interesting is going on, something that seems potentially exciting and profitable. You might not know all the fine details, but it seems exciting and, even worse, the window of opportunity to jump on board might be closing.

That’s the fear of missing out. Without that sense of fear that our opportunity might go away, we’d probably skip the opportunity, or at least delay our decision for a while.

What’s the financial danger of FOMO?

The financial danger of FOMO is that you’ll end up spending money on something without giving it proper consideration. Because you’re afraid of missing out, you overlook some other red flags about the opportunity and get on board anyway.

Sometimes, this can work out well, but because you overlooked some red flags, there’s a higher than normal chance that this expense ends up being one you regret in the long run. It is those regretted expenses, the ones that were clearly poor uses of money, that end up creating financial danger, because there are so many better uses for your dollars than an expense you regret. For example, one virtually never regrets eliminating debt or building an emergency fund or saving for retirement or saving for a house down payment.

How FOMO shows up in investing

The fear of missing out shows up in investing when there’s a particular investment that’s either currently doing exceptionally well or someone has convinced you is about to do exceptionally well. This means that there’s a group of investors that is either making a lot of money or is going to make a lot of money, and you want in.

The problem is that, quite often, by the time you hear about a great investment opportunity, the chance to make a profit has already sailed, and in fact, you’d simply be buying high rather than buying low and selling high.

FOMO, GameStop, and Dogecoin

The latest examples of FOMO in the investing world are the recent success of small investors buying into shares of GameStop and the recent leaps in value in some cryptocurrencies, most notably Dogecoin, a cryptocurrency like Bitcoin that experienced a similar surge recently. In both of those cases, a handful of early investors made a lot, and some later investors did quite well, too.

It can be really tempting to jump in once you start hearing about success stories like this, but more often than not, as soon as a story like this becomes big, the window of opportunity to make a big return is closing or has already closed. GameStop became a big story when it reached $200 a share, and after a few days of intense volatility, it rapidly fell below $100 a share. Dogecoin jumped rapidly from less than $0.01 per coin to more than $0.08 per coin in less than a week, but as soon as it became well known, it dropped back down to the $0.05 level.

These investments would have been stellar opportunities at the start, but by the time they became big new stories, they were at or near their peak, and the people who bought in then were left holding an overpriced investment.

How to avoid FOMO in investing

What can you do to avoid the fear of missing out when it comes to investing? Here are four key strategies.

Don’t bother with speculation once it’s big news

By the time you hear about a hot new investment in the news, it’s likely because the investment has already increased many times in value and it’s that increase that’s warranting the news reports. This was clearly the case with GameStop and Dogecoin recently. With Gamestop, there’s not much to say about an electronic gaming retailer with a stock price around $5, but when it suddenly jumps to $100 a share, then there’s something to talk about.

The catch, of course, is that by the time it’s interesting enough to report on, the window to “buy low” in the traditional “buy low, sell high” maxim has already passed. It’s already “high” now, and the best you can hope for is “buy high, sell higher.” That’s rarely a good idea. Most likely, you’re going to be the buyer when someone else who bought low is selling high. That’s not where you want to be.

Don’t invest in what’s hot in the news. In fact, you should entirely avoid investing based on news and pop culture. Most mainstream media reporting on investing is just noise in terms of what an individual investor should do, so treat it accordingly.

Don’t invest on a friend’s word without additional evidence you understand

What if a friend comes to you with a hot investment tip? While that might be a starting place for your own investigation into an investing strategy, it’s not nearly enough on its own for you to put your money into.

For starters, where did your friend get that information? Is your friend’s source trustworthy, and can you verify the trustworthiness of that source beyond your friend vouching for them? There are many shady investment deals that are spread via word of mouth, such as the pump and dump stock scam. Your friend might be entirely well-meaning while still being a victim of such a scam.

Simply put, do not put your hard-earned money into any investment recommended by a friend unless you can do completely independent research on the topic and fully understand what you are investing in. If you’re not sure how to invest, there’s no better time than the present to learn more about investing.

Use index funds and a ‘buy and hold’ approach

So, if those are things to avoid, what should you do instead?

The best investing approach for most individual investors who don’t have abundant time or knowledge to deeply investigate investment opportunities is to buy index funds and hold them until you need to sell them. An index fund is a very simple way to widely diversify your investments, allowing you to buy, say, a small portion of all publicly traded stock with a single purchase. This allows you to match the stock market with very little cost. While you’ll still see your investment rise and fall, you won’t experience your investment losing most of its value over the long term.

Invest in riskier things only with funds you can afford to lose

If you really are tempted to buy into the next GameStop, do so with money that you can completely afford to lose — your hobby and entertainment money. Don’t use money that you would otherwise use for repaying debts or saving for retirement or saving for your child’s college education. That money should be invested in more stable and reliable investments.

If you want to speculate, treat it as pure entertainment, and lose only money that you can afford to lose as entertainment without disrupting retirement plans.

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