What are Bitcoins?

Bitcoin is a type of cryptocurrency, people also refer to it as electronic cash. The creator of this type of virtual currency, to date, remains unknown. Only the pseudonym, Satoshi Nakamoto has been linked as the creator of bitcoin.

Bitcoin was also the very first type of cryptocurrency. One of the main features is that they are not issued or controlled by any central authority, this feature keeps the bitcoin transactions outside the control of the government. Over the last decade many changes have taken place, from taxing of bitcoins to the creation of bitcoin tax software. These events have shaped the way people use bitcoins today. Though it is a form of currency, it differs a lot from fiat currencies due to its distinctive features, which are as follows.

Decentralized System

One of the key characteristics of bitcoins is that they are a part of a decentralized system. This means that bitcoins and bitcoin transactions are not under the control of any government. Bitcoin is a computer file that can be stored in a digital wallet, on your computer and mobile phone. It enables the bitcoin holder to receive and send bitcoins to other people and all transactions are recorded on a public ledger called the blockchain.

Security

With encryption techniques used to record transactions on the public ledger called blockchain, bitcoin transactions are more secure than fiat currency transactions. This is mainly due to the decentralized system in which it operates. Bitcoins are held and maintained on the blockchain network which is spread across the world.

Anonymity and Pseudonymity

Anonymity and pseudonymity is a great feature and was one of the reasons why bitcoin acquisition surged. Bitcoin holders have no need to identify themselves at any given point in time. Bitcoins are identified by a sophisticated combination of numerical units which can be accessed only with the help of a private key. Hence, it possible for a bitcoin holder to transact without revealing his/her real identity. Bitcoins holders can use pseudo names if they wish to.

Limitations of Supply

Unlike fiat currencies, where the supply is unlimited and the circulation is controlled by central and private banks. When it comes to bitcoins, it is not controlled by the government but is governed by an underlying algorithm. It is designed in such a way that the supply of bitcoins stays limited, the limit of bitcoins was set to 21 million, at the time of creation. With limited supply, the value of bitcoins will also increase over time.

Transparency

One of the key fundamentals of bitcoin is transparency, as it was essential to making transactions happen between two anonymous people. As transactions are recorded on a public ledger, it can be viewed by anyone. This public ledger cannot be manipulated and it is extremely hard to double-spend bitcoins because of their transparent nature. These are just a few of the benefits that bitcoins carry however, they also have their own set of disadvantages.

  • Highly volatile value.
  • It loses its functionality without the internet.
  • Loss of private keys can lead to loss of bitcoin transactions for the respective bitcoin holder.
  • Most benefits of bitcoins can be reaped by early investors.
  • The government may ban the use of bitcoins.
  • It is completely digital, this means if your computer breaks down and if you lack the required back up, you can lose all your digital currency.

Bitcoin Tax

Due to the nature of the decentralized system that the bitcoins work in, it opens up an avenue for black marketers who may be involved in illegal businesses. This is one of the main reasons, authorities have started taxing bitcoin transactions. The Internal Revenue Service (IRS) also stated that bitcoins and other types of cryptocurrencies should not be viewed as currency but as a property/asset making the implication of the tax very clear to bitcoin holders. The IRS also sent warning letters to more than 10,000 suspected bitcoin holders who have not reported their holdings. It also mentioned that failure to comply will lead to heavy penalties and possible criminal persecution.

With this law, bitcoin holders have to now calculate the capital gains on their transactions. If the bitcoin holder happens to hold the bitcoin for less than a year, then short term capital gains are applied. If the bitcoin holder happens to hold the bitcoin for more than a year then long term capital gains will be applied.

These calculations can be quite cumbersome and time-consuming. This is why bitcoin tax software is available, to help people calculate their taxes on bitcoin transactions accurately.

Bitcoin Tax Calculators

Bitcoin tax software and tax calculators are available online and help bitcoin holders calculate their bitcoin taxes without hassle. By using crypto tax software, the bitcoin holder can ensure that they stay on the right side of the law. Here are a few of the leading bitcoin tax software in the market today.

Koinly

Apart from calculating the capital gains report, transfer detection, and income reports, this bitcoin tax software is also involved in catering to Initial Coin Offering (ICO) start-ups and mining companies.

CoinTracking

It is a bitcoin tax software that provides the user with real-time coin fluctuation, tax reports and more. They are one of the leading software in the game.

ZenLedger

A bitcoin tax software who partnered with TurboTax, ZenLedger accepts all major fiat currencies and cryptocurrencies and are also IRS compliant.