You can’t go to any major news website today without seeing something about Bitcoin and its meteoric rise from about $1,000 in January of 2017 to over $16,000 in 11 months!
Billions of dollars are being made in this new market and it’s no wonder that interest in Bitcoin and other cryptocurrencies is white hot right now.
What is Bitcoin? How do I buy & sell it? Will I be taxed on my Bitcoin sales?
These are all very important questions, and while we can’t speculate to how long this trend will last or if investing in Bitcoin is right for you, we can help educate you to make a more informed decision.
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What Is Bitcoin?
Bitcoin, released in 2009, is a peer-to-peer cryptocurrency that is considered the first decentralized digital currency as it works entirely without a central bank.
All transactions are recorded in a ledger called a “blockchain” which is public record and immutable, which in simpler terms means the transactional records can be viewed by anyone and never be altered.
Why is this important?
Think of it this way. Paper money can be printed over and over again. You could theoretically never know how much paper money is in circulation, and it could never stop printing – which would devalue the currency. Furthermore, this paper currency is physical which has its own limitations and range of abuses – including counterfeiting.
The beauty of Bitcoin is in the blockchain, that digital ledger. In simple terms the blockchain keeps everything accountable. You can’t copy or reprint the money as it wouldn’t sync up with the ledger and since the blockchain is publicly available everyone can see any or all of the transactions ever recorded.
Since Bitcoins are entirely digital this means that there is no physical product. You can’t store these coins in a billfold in your back pocket or spend them at your local grocery store (just yet) – in fact, there’s nothing to even look at except a bunch of numbers!
Instead, Bitcoins and other cryptocurrencies are stored in a digital wallet and protected with private keys. What you choose to do with them, spend or save, is up to you.
Security: A bitcoin transaction involves both a public key, which is generally known to everyone, and a private key known only to the bitcoin user. You can not spend or transact a bitcoin without the private key, this is very important.
How Are Bitcoins Created?
Bitcoins are definitely not like any currency you’re used to and that’s for good reason. Bitcoin is not tied to gold or controlled by a financial institution or country – it’s completely free of the typical tethers of a physical fiat system.
Unlike traditional printing presses, Bitcoins aren’t pressed. They aren’t even “created” like you would think – they’re already out there, they’re just “hidden”, kind of like gold or a diamond just waiting to be found and put into circulation.
The way to do this is called mining.
Bitcoin’s are mined using computers that solve complex mathematical calculations. When the problem has been solved, the Bitcoin will be awarded to the winner.
Though, be warned, as simple as it sounds, it’s anything but.
In the early days of Bitcoin mining you were able to use your personal computer to mine. In 2017 and beyond this is just not possible. The processing power and energy required is just too great.
How Many Bitcoins Are There?
The total number of Bitcoins in circulation today exceed 16 million, but even more important to note is that there is a hard cap on how many coins will be produced – and that number is 21 million.
Bitcoins are released on a scheduled time table up until the year 2040 when all 21 million Bitcoins will be in circulation and there will be no more left to mine.
If you feel like you’re late to the mining game, or simply don’t want to get involved in it – there’s an alternative. You can buy bitcoins on the open market.
How To Buy Bitcoin
An exchange is where most people buy Bitcoins and other cryptocurrencies. On an exchange, Bitcoin is traded for dollars, euros, yen, and other currencies in real time 24 hours a day.
Exchanges, act as an intermediary between buyers and sellers, kind of like an auction house.
Buying On An Exchange
To start buying on an exchange you will need to create an account and deposit money onto the exchange. Think of it like setting up a trading account at a brokerage.
From there you have the option to buy & sell, and in some instances use more advanced features such as limit orders. Each exchange has their own fees, so you will need to weigh those fees in your decision as to which exchange to go with.
Here are a few of the more popular Bitcoin exchanges.
- Bitstamp: Slovenian-based; Allows limit orders; rates as low as 0.5%.
- Coinbase: US-Based; 1% + $0.15 fee, no advanced limit/stop/bid/ask/margin features; Best for newcomers.
- Kraken: For advanced traders; offers Bitcoin, Ethereum, Litecoin, Dogecoin, Ripple, Namecoin & Ven.
Buying In Person
Don’t want to use an exchange, or just want another option? You can always buy in person with a face-to-face transaction. Though, be warned, it can be as dangerous as it sounds!
There are some marketplaces such as LocalBitcoins.com out there catering to linking together those that want to buy and sell coins outside of exchanges. This means that you can conduct face-to-face, or in some instances allow direct deposit of cash from an individual in exchange for coins.
Keep in mind, as is the case with all person-to-person transactions with strangers, fraud is a concern.
Important: Once you have purchased your bitcoin, move them to a location within your control. Don’t store coins long-term on an exchange!
How To Store Bitcoin
Many people new to Bitcoin think they can just purchase the coins and park them at the same place they bought them (such as an exchange). And while it’s true they can, this isn’t the safest idea.
It’s generally accepted that once you purchase your coins you must move them somewhere in which you have control, such as your own wallet.
Why? Here are a few reasons.
- ) Exchanges can be hacked.
- ) You don’t control the keys until you move them to a wallet so they’re never “technically” yours.
- ) You can’t easily transfer them to another person or exchange for sale.
Now that you know why you should be moving all newly purchased coins off of an exchange into a wallet, what type of wallet should you use?
Here are some popular wallet types.
Hardware Wallets: Hardware wallets are a lot like USB drives. What you would think as digital storage, and they work much like you would think. They’re used as offline storage devices to store and keep your coins safe.
These type of wallets are generally considered for people that want to keep large amounts of Bitcoin offline.
Here are some types of hardware wallets available
- Ledger Nano
Software Wallets: Like the name implies, software wallets are digital, not physical. They are often kept on a computer attached to the Internet. This makes them easier to quickly spend, however it does introduce vulnerability as will anything kept online.
That isn’t to say there isn’t some serious security involved, it’s just typically not where people that have a lot of money in cryptocurrency choose to keep their asset.
These are some of the software wallets available.
- AirBitz (iOS & Android)
- Armory (Desktop)
- Bitcoin Core (Desktop)
- Bitcoin Wallet (Android)
- CoPay (iOS)
- Electrum (Desktop)
- Multibit HD (Desktop)
- Mycelium (Android)
How To Sell Bitcoin
Want to cash in? Sell your BTC on an exchange like Coinbase. Link up your bank account and when the funds clear your cash will be deposited into your bank account.
If you read the “How To Buy Bitcoin” section above then you already know the answer to this for selling. It works exactly the same way and you have the exact same options.
- Use an exchange to sell your coins
- Sell your coins in person or to an individual directly
Once your coins are sold, depending on how you transact (locally or through an exchange), the proceeds can be deposited in your account instantly (individual) or within 3-5 business days (exchange)
Important: Pay attention to your tax liability on sales! Below we discuss tax liabilities for Bitcoin, but as always, keep a good record of transactions and speak to an authorized tax specialist.
Where Can I Spend Bitcoin?
The number of stores where you can buy products using Bitcoin is changing rapidly. More and more stores are accepting Bitcoin every month and it would be impossible to list all of them here. Instead, here’s a small list.
- Shopify Stores: Merchants are able to accept Bitcoin.
- Expedia: Planning a trip? Pay for it in Bitcoin!
- Overstock.com: One of the many merchants accepting Bitcoin.
- Dish: Have DISH network? Pay for it with Bitcoin.
- Square: Any merchant that uses Square can accept Bitcoin.
- Stripe: Any merchant that uses Stripe can accept Bitcoin.
Paying Taxes On Bitcoin
Before filing your taxes please consult with a tax professional.
Bitcoins are taxed based on the way they are used. The IRS has released a notice answering common questions about the taxation of Bitcoins – https://www.irs.gov/irb/2014-16_IRB/ar12.html (skip down to Notice 2014-21: IRS Virtual Currency Guide)
According to IRS rules, “a taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received.”
Note: To determine fair market value, you can use an exchange such as Coinbase to identify the FMV at the time of receipt.
Bitcoins and other cryptocurrencies are considered “convertible virtual currencies” Since they do not have legal tender status in any jurisdiction they are not currency under their definition, however, they can be converted to currency, such as US Dollar, British Pound, .etc
At this point the IRS chooses to classify convertible virtual currencies as property subject to capital gains taxes.
If You Are An Investor
IRS Form 8949 is used to report capital losses and capital gains.
- Held For 1 Year Or Longer
If you hold Bitcoins as a capital asset you must treat them as property for tax purposes when you sell them, or realize gains. This is no different than any other capital asset such as stock or bonds.Long-term transactions go on the second page and checking box F. Just like other property, the maximum deduction you can take for losses in a calendar year is $3,000.
- Held Under 1 Year
Considered a “short term gain” and treated as ordinary income taxed at your Federal rate. Short-term bitcoin1`transactions should go on the first page of Form 8949 checking box C.
If You Are A Bitcoin Miner
Miners are required to report the receipt of Bitcoins at the Fair Market Value at the time of receipt. Furthermore, you will be considered self-employed and will be required to pay self-employment tax on your earnings.
If You Are An Employer Paying Employees Or Contractors In Bitcoin
You must report employee earnings to the IRS on W-2 forms and contractor earnings on Form 1099.
If You Are An Employee Or Contractor Paid In Bitcoin
You must keep accurate records of when you received each payment as you’ll need to report the bitcoins as income at their fair market value.
Getting The Most Out Of Your Tax Deductions
When it comes time to do your taxes you want the maximum amount of deductions. One way to do this is to make sure that you’re getting your the most of your business mileage deduction and when you use an app like Everlance, that automatically tracks over 1,000,000 miles every single day, you’re going to get the maximum deduction.
Here are some of the features of Everlance and why you should be using it right now.
Automatic Mileage Tracker: Just Drive. We Take Care Of The Mileage.
– Go for a drive, we track the mileage automatically in the background.
– Easily swipe to classify your trips.
Business Expense Tracker: Expenses, Receipts & Revenue.
– Automatic Expense Tracking: Link your bank or credit card to track expenses automatically.
– Receipt Storage: Upload and keep all of your receipts organized securely in the cloud.
Mileage and Expense Reports
– Accurate mileage reports for tax deductions or business reimbursements
– In-depth expense and revenue reports in both excel and PDF formats
– IRS compliant reports
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