Created more than a decade ago, Bitcoin has remained the most popular cryptocurrency on the market. A 2021 report from New York Digital Investment Group found that an impressive 46 million Americans own Bitcoin in 2021, which equates to about 22% of the adult population.
But there’s a lot to learn before you start investing in Bitcoin. In this article, we’ll cover what Bitcoin is, how to buy Bitcoin, how to use your Bitcoin holdings, and everything else you need to know.
- Bitcoin was the first major cryptocurrency and was founded in 2009.
- There are many ways to acquire Bitcoin, including purchasing it on an exchange, receiving it from a friend, or accepting it as payment for a good or service.
- An increasing number of retailers accept Bitcoin as payment, including major merchants like Overstock.
- While not all retailers accept Bitcoin, payment networks that convert Bitcoin make it easier for consumers to spend.
- While Bitcoin acts like a currency in some ways, it’s taxed like other financial investments, and it’s important to understand the tax consequences of using or selling your Bitcoin.
Bitcoin is a type of cryptocurrency created by Satoshi Nakamoto in 2009. It’s just one of many types of cryptocurrency, which are digital currencies that exist on decentralized finance networks using blockchain technology.
For regulatory purposes, Bitcoin and other cryptocurrencies aren’t actually a form of currency. Instead, according to the U.S. Commodity Futures Trading Commission, they are considered a commodity. The IRS, on the other hand, treats cryptocurrencies as property for tax purposes.
That being said, there are plenty of ways to use your Bitcoin as a currency, including buying goods and services and making international transfers.
Since it started trading, Bitcoin’s price has experienced spectacular growth but also incredible volatility. For example, in 2017 Bitcoin crossed $1,000 for the first time and reached a record high of more than $19,000 by the end of that year, before diving to nearly $3,000 just a year later. In April 2021, the crypto set new highs when its price went past $64,000.
Choosing a Bitcoin Wallet
If you decide to invest in Bitcoin, you’ll also need to find a cryptocurrency wallet. Unlike in the case of traditional currency, you don’t actually store your Bitcoin 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. There are two different types of cryptocurrency wallets to choose from: hot wallets and cold wallets.
A hot wallet is one that exists online or simply one that’s connected to the internet. Hot wallets are found on either websites or mobile apps. The benefit of a hot wallet is that you can easily access your cryptocurrency with your phone without needing another piece of equipment. That being said, hot wallets are also vulnerable to hacking because they are online.
Some of the hot wallets that can be used to store your Bitcoin keys include:
- Bitcoin Wallet
- Eclair Mobile
A cold wallet is a way of storing your Bitcoin keys offline, typically in a separate piece of hardware. Cold wallets are considered a safer option since they aren’t vulnerable to hacking. That being said, you run the risk of losing your hardware and access to your Bitcoin along with it.
Some of the cold wallets that can be used to store your Bitcoin keys include:
- Ledger Nano S
- Trezor Model T
- Trezor One
How To Get Bitcoin
The simplest way to get Bitcoin is to buy it on a cryptocurrency exchange. These exchanges are similar to the trading platforms where you’d buy and sell traditional financial assets, but they’re designed for cryptocurrency. Because Bitcoin is the largest cryptocurrency, it’s easy to find on exchanges. Some of the popular cryptocurrency exchanges include Coinbase, Kraken, FTX, Bitfinex, and Gemini among others.
Keep in mind that not all of the exchanges above are available in all countries. Be sure to check availability near you before signing up for an exchange.
While buying Bitcoin is the simplest way to get your hands on it, it’s certainly not the only way. A few other methods you can consider include:
- Accepting Bitcoin as a payment for goods or services
- Receiving Bitcoin from another individual
- Earning Bitcoin by mining it
How To Spend Bitcoin
Bitcoin isn’t like traditional currency where you can use it anywhere to purchase goods and services. That being said, there are still plenty of places you can use and spend your Bitcoin.
Bitcoin Debit and Gift Cards
Several online retailers allow you to use debit cards or purchase gift cards to use your Bitcoin holdings.
First, several companies offer cryptocurrency debit cards that allow you to spend the money in your cryptocurrency account on 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 at the time of the transaction.
If you’d rather not spend directly your cryptocurrency, you can also use your Bitcoin to buy gift cards to spend elsewhere. Websites like eGifter and Gyft let you purchase gift cards from hundreds of different retailers using Bitcoin instead of dollars. These gift cards provide a great opportunity to spend your Bitcoin with merchants that don’t usually accept it.
Shopping with Bitcoin
While using gift cards and cryptocurrency debit cards can be a great way to spend your Bitcoin, some merchants actually accept Bitcoin as a form of payment. Some major companies like Overstock and Newegg accept Bitcoin.
There are also ways to use Bitcoin for purchases at merchants that don’t actually accept Bitcoin. Flexa is a payment network that supports many different currencies, including cryptocurrencies. When you use the Flexa payment network and its own mobile wallet SPEDN, you can pay in any supported currency, and it will be converted at the time of the purchase. Flexa is accepted at many major retailers in the United States, including Nordstrom, Whole Foods, and Starbucks. Flexa does have a $250 spending limit per week.
PayPal has recently enabled a similar feature for its users. You can buy, hold, and sell Bitcoin in your PayPal account. Then, if you decide to spend your Bitcoin, you can use it to fund online transactions. PayPal will convert your Bitcoin into dollars. Keep in mind that because converting Bitcoin to dollars is selling an asset, you will need a W-9 on file with PayPal to use this feature.
If you aren’t sure what retailers accept Bitcoin, there are also online search engines that allow you to search for specific Bitcoin-friendly products and retailers.
Giving Bitcoin to Charity
Many nonprofit organizations now allow donations in the form of Bitcoin rather than dollars. Not only does donating your Bitcoin 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. Additionally, because the charity doesn’t have to pay capital gains taxes, they’ll receive the full value of the amount you contribute.
Using Bitcoin as the Price Changes
The price of Bitcoin changes throughout the day. In fact, if you watch the Bitcoin price throughout the day, you’ll notice that it can change as often as every few seconds. Because the price changes so often, the value of your Bitcoin holdings — and therefore the amount you have available to spend—changes often also.
Unlike credit cards, cryptocurrency payments do not come with legal protections and may not be reversible, which makes it difficult to dispute any charges.
As you plan to spend your Bitcoin, it’s important to consider the exchange rate. Let’s say you have $100 worth of Bitcoin in your cryptocurrency wallet and plan to spend it on a purchase that costs $100. You might go back just a few minutes later and find that your Bitcoin holdings are no longer worth $100. At the time of a transaction, you can only spend as much as your Bitcoin is currently worth.
How Bitcoin Is Taxed
If you’re going to invest in Bitcoin or another cryptocurrency, it’s critical that you understand the tax consequences. According to the IRS, Bitcoin is considered property rather than a currency. As a result, when you sell Bitcoin, your gains are subject to capital gains taxes.
The amount you’ll pay in capital gains taxes depends on how long you hold your Bitcoin. If you hold your Bitcoin for less than one year and sell at a profit, your gains are taxed as regular income. If you hold your Bitcoin for more than one year and then sell for a profit, you’ll be taxed at either 0%, 15%, or 20%, depending on your household income.
Keep in mind that using your Bitcoin to pay for a product or service is, for tax purposes, the same as selling your Bitcoin. As a result, you’ll have to pay capital gains taxes.
It’s also worth noting that while you’ll pay capital gains taxes on any profit you make from your Bitcoin, you can also use losses to offset any gains you have, and even reduce your taxable income. The IRS allows you to deduct up to $3,000 of capital losses, which reduces your taxable income for the year.
Frequently Asked Questions (FAQs)
How do you use a Bitcoin ATM?
A Bitcoin ATM is a tool that allows you to turn your cash into Bitcoin instantly. Rather than a traditional ATM, which allows you to withdraw money, a Bitcoin ATM is one where you insert money. The cash you deposit is then turned into Bitcoin.
What can you buy with Bitcoin?
You can buy many things with Bitcoin. In addition to the retailers that accept Bitcoin, there are other ways to make a purchase with your Bitcoin using payment networks like PayPal and Flexa.
How can I get Bitcoin?
You can get Bitcoin by purchasing it, accepting it as payment for goods and services, mining it, or receiving it from someone you know.
Can Bitcoin be used as real currency?
While there are some merchants that accept Bitcoin as payment, it’s not a form of real currency. Because it’s considered property instead of currency, there are tax consequences to using or selling it.