Bitcoins: All You Need To Know About This Unique Form of Currency

Gaining immense popularity since its inception in 2009, Bitcoin has also gained a lot of importance as a unique form of currency, which is one of a kind.

What are Bitcoins?

Bitcoins are a type of cryptocurrency or in simple terms, they are a type of digital currency that is part of a decentralized system known as blockchain. The same system is used to record, verify, and store bitcoins and bitcoin transactions. One important feature of bitcoins that make them as popular as they are now, is that they are not issued or controlled by any centralized authority. Apart from that, the ease and speed at which the transactions take place are almost untouchable, and people can transact with other bitcoin holders from all over the world.

How do Bitcoin Work?

Bitcoins are is a computer file that is stored in a digital wallet on your mobile or computer and people can send you bitcoins to your digital wallet and vice versa. Each transaction is recorded on a public ledger called the blockchain. This makes every transaction traceable and makes it easy to stop fraudulent acts.

Following are some of the feature of bitcoins

• Ease of transaction
• User Anonymity
• Blockchain technology 
• Private keys
• wallets

What are the Advantages of Bitcoins?

There are a lot of advantages to having a bitcoin

Reduction in Frauds

Since bitcoins are a form of digital currency, it is very hard to duplicate and the irreversible nature also makes it hard for people to commit fraudulent acts.

Reduction in Identity Theft

As we know, bitcoins are a part of a decentralized system that is not controlled by any kind of authority and that’s why there is no need for anybody to identify themselves. Bitcoin uses the “push” method of transaction that allows the sender to just send what is required with no further information. You just need to have a bitcoin wallet, even your name is not required.

Immediate Transfers

Bitcoin contracts can be designed to add or eliminate 3rd party approvals as per your requirement and the transfers happen quickly and efficiently. Also, these transactions are recorded and verified on the blockchain making them secure.

Lower to None Transaction Fees

Typically, there are no transaction fees that are levied on bitcoin transactions but it has been observed that a lot of people do involve a third-party service such as ZenLedger to help them maintain and manage their wallet and transactions.

What are Bitcoin Taxes?

Now, whenever you buy and sell bitcoins, you will be taxed. This is because the Internal Revenue System (IRS) stated that bitcoins should be treated as property and not currency. 

This called bitcoin tax and in the IRS also states in Notice 2014-21 “For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency”. Transactions in digital currency must be subjected to the calculation of gross income and add the value of the digital currency in U.S. dollars on the date of the transaction.

To calculate bitcoin tax, users are required to calculate the gain and loss every time they are involved in a bitcoin transaction. If the bitcoins are held for less than a year before transacting, then short term gains are applied and they are held for more than a year then long term gains are applied.

In July 2019, the federal agency sent warning letters to more than 10,000 taxpayers that they suspect to have virtual currency, the letter stated that if the digital currency holders failed to report income and pay the bitcoin tax amount, that is the result of bitcoin transactions then they will be heavily penalized and they may even face criminal prosecution. Bitcoin holders have to report every transaction without fail regardless of how big or small it is in value.

Short term capital gain is applied when the bitcoin is held for less than a year before transacting and it is equivalent to the ordinary income tax. If the bitcoin is held for more than a year then long term capital gain is applied and that is applied to any bitcoin holders with taxable income which is more than $78,750.

Bitcoin Tax Software

With the ever-growing popularity of cryptocurrency and bitcoins and the recent tax implementation makes things a little bit more complicated. Every bitcoin transaction is now taxed, this in simple words this is called bitcoin tax. That means you have to calculate taxes on every transaction where bitcoin is involved and this is a lot of work, but with the advent of bitcoin tax softwares, calculating the long/short term capital gains and the taxes becomes extremely easy and there is no room for human error in calculations.

Bitcoin Tax Softwares

Here is a list of some of the best bitcoin tax softwares

ZenLedger

With a user-friendly interface, it is easy to calculate transactions and they support all major crypto and fiat currencies and are IRS compliant.

Token Tax

They support all international exchanges and help in providing reports for multiple accounts. They are also into servicing mining companies and help with tax-loss harvesting.

CryptoTrader

Developed by Coin Ledger, Crypto Trader easily allows you to import your trades, add your crypto income, and download a report. 

Lukka 

Earlier known as LibraTax, is an accounting software that helps you in pricing and evaluating your crypto assets apart from helping you do your taxes.