Created more than a decade ago, bitcoin remains the most popular cryptocurrency on the market. A 2021 report from the New York Digital Investment Group found that an impressive 46 million Americans own bitcoin in 2021, which is equivalent to about 22% of the adult population.
But there is a lot to learn before you start investing in bitcoin. Learn what it is, how to buy it, how to use your holdings, and everything else you need to know.
- Bitcoin is the first major cryptocurrency, founded in 2009.
- There are many ways to get bitcoin, including buying it on an exchange, receiving it from a friend, or receiving it as payment for goods or services.
- More and more retailers are accepting bitcoin as payment, including wholesalers like Overstock.
- While not all retailers accept bitcoin, payment networks that convert bitcoin make it easier for consumers to shop.
- While bitcoin acts as a currency in some ways, it is taxed like any other financial investment, and it is important to understand the tax consequences of using or selling your bitcoins.
Bitcoin is a type of cryptocurrency created by an anonymous individual or group known as Satoshi Nakamoto in 2009. It is just one of many types of cryptocurrency, which is a digital currency that exists on a decentralized financial network using blockchain technology.
Bitcoin and other cryptocurrencies are not a form of currency, nor are they recognized by regulatory authorities. Instead, according to the US Commodity Futures Trading Commission, they are considered commodities. The Internal Revenue Service, on the other hand, treats cryptocurrencies as property for tax purposes.
However, there are many ways to use your bitcoins as currency—you can buy goods and services or make international transfers.
Since it started trading, the price of Bitcoin has experienced spectacular growth but also tremendous volatility. For example, in 2017, bitcoin hit $1,000 for the first time and skyrocketed to over $19,000 by the end of that year; a year later, it fell to nearly $3,000. In October 2021, the cryptocurrency set a new high when its price crossed $66,878.
Choosing a Bitcoin Wallet
If you decide to invest in bitcoin, you will also need to find a cryptocurrency wallet. Unlike traditional currencies, you do not store bitcoins in your cryptocurrency wallet. Instead, your wallet is a tool where you store the private keys you need to access your cryptocurrency on the blockchain. You can choose between a hot or cold cryptocurrency wallet.
Hot wallets are online or connected to the internet. You can find hot wallets on websites or mobile apps. The benefit of hot wallets is that you can easily access your cryptocurrencies with your phone or other device. However, hot wallets are also more susceptible to being hacked because they are online.
Some hot wallets you can use to store your Bitcoin keys include:
A cold wallet is a way of storing your Bitcoin keys offline, usually on a separate piece of hardware. Cold wallets are considered a more secure option, as they are less prone to hacking. Because of this, you run the risk of losing your hardware and access to your bitcoins with it.
Some cool wallets you can use to store your Bitcoin keys include:
- Nano S . Ledger
- Nano X . Ledger
- Trezor Model T
How to Get Bitcoin
The simplest way to get bitcoin is to buy it on a cryptocurrency exchange. This exchange is similar to a trading platform where you buy and sell traditional financial assets, but is designed for cryptocurrencies. Since bitcoin is the largest cryptocurrency, it is easy to find on exchanges. There are several exchanges, but some of the most popular include Coinbase, Kraken, Binance, and Gemini.
Keep in mind that not all of the above exchanges are available in all countries. Be sure to check availability near you before signing up for an exchange.
While buying bitcoins is the simplest way to get them, it’s certainly not the only way. Some other methods you may consider include:
- Accept bitcoin as payment for goods or services
- Receive bitcoins from other people
- Earn bitcoin by mining it
How to Spend Bitcoin
Bitcoin is not like traditional currency, where you can use it anywhere to buy goods and services. However, there are still many places where you can spend your bitcoins.
Bitcoin Debit Cards and Gifts
Some online retailers allow you to use a debit card or purchase a gift card to use up your bitcoin holdings.
Some companies offer cryptocurrency debit cards that allow you to spend money in your cryptocurrency account with a normal debit card. You can use a cryptocurrency debit card to pay for goods and services. You can also use it to withdraw cash at an ATM.
When you use a cryptocurrency debit card, your cryptocurrency is automatically converted into dollars.
If you prefer not to spend your cryptocurrency right away, you can also use your bitcoins to buy gift cards to spend elsewhere. Websites like eGifter and Gyft allow you to buy gift cards from hundreds of retailers with bitcoin. These gift cards provide a great opportunity to spend your bitcoins with merchants who don’t normally accept them.
Shop with Bitcoin
While using gift cards and cryptocurrency debit cards can be great ways to spend your bitcoins, some merchants accept bitcoins as a form of payment. Some major online retailers like Overstock and Newegg accept bitcoin.
There is also a way of using bitcoins for purchases at merchants that don’t accept them. For example, Flexa is a payment network that supports many different currencies, including cryptocurrencies. When you use the Flexa payment network and its mobile wallet SPEDN, you can pay in any supported currency, and it will be converted at the time of purchase. Despite having a spending limit of $750 per week, Flexa is accepted at many major retailers in the United States, including Nordstrom, Lowes, and Petco.
PayPal recently enabled a similar feature for its users. You can buy, hold and sell Bitcoins in your PayPal account. Then, if you decide to spend your bitcoins, you can use them to fund online transactions. PayPal will convert your bitcoins into dollars. Remember that converting bitcoins to dollars means selling assets; You need a W-9 on file with PayPal to use this feature.
If you’re not sure which retailer accepts bitcoin, you can use online search engines to find bitcoin-friendly products and retailers.
Giving Bitcoin to Charity
Many nonprofits now allow donations in bitcoins rather than dollars. Not only does donating your bitcoins allow you to support a good cause, but it also has tax benefits. First, you may get a tax deduction for the amount you donate. In addition, because charities don’t have to pay capital gains tax, they will receive the full value of the amount you donate.
Using Bitcoin as a Price Change
The price of Bitcoin changes throughout the day as supply and demand affects the market. If you pay attention to the price of bitcoin, you will notice that it can change as often as every few seconds. Because prices change frequently, the value of your bitcoin holdings—and therefore the amount you have to spend—changes frequently as well.
Unlike credit cards, cryptocurrency payments do not come with legal protections and may not be reversed, making it difficult to dispute fees.
For example, you have $100 worth of bitcoins in your cryptocurrency wallet and want to buy $100 worth of goods. You place the item in your cart and proceed to check out. Unfortunately, you receive a notification saying that you don’t have enough funds for the transaction. but what happened? You’ve had enough when you add it to your cart.
This is likely due to fluctuating prices. It’s not uncommon for bitcoin prices to drop a few cents quickly. If the price drops between the time you move the item to your cart and the time you click the buy button, you may not have enough bitcoins to spend.
How Bitcoins Are Taxed
If you are going to invest in bitcoin or any other cryptocurrency, you must understand how you will be taxed. According to the IRS, bitcoin is considered property rather than currency. As a result, when you sell it, your profits are subject to capital gains tax.
The amount you will pay in capital gains tax depends on how long you have held your bitcoins. If you hold your bitcoins for less than a year and sell at a profit, your profits are taxed as regular income. However, if you hold your bitcoins for more than a year and then sell them for a profit, you will be taxed at 0%, 15%, or 20%, depending on your household income.
Remember that using your bitcoins to pay for products or services, for tax purposes, is the same as selling your bitcoins. As a result, you will have to pay capital gains tax on the amount you spend if the amount is an increase in value from the date you acquired the bitcoins.
It’s also worth noting that while you will pay capital gains tax on any gains you make from your bitcoins, you can also use the losses to offset any gains you have and even reduce your taxable income. The IRS allows you to deduct capital losses of up to $3,000, which reduces your taxable income for the year.
Frequently Asked Questions (FAQ)
How do you use a bitcoin ATM?
A bitcoin ATM is a tool that allows you to convert cash into bitcoins instantly. Rather than traditional ATMs, which allow you to withdraw money, bitcoin ATMs are where you put money. The cash you deposit is then converted into bitcoin.
How can I get bitcoins?
You can earn bitcoins by buying them, receiving them as payment for goods and services, mining them, or as gifts. Many apps and services will help you earn bitcoins. Some function like brokers with an emphasis on charting and trading bitcoin price movements. Others such as payment services that allow you to transact in bitcoins as well as US dollars.