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Bitcoin Basics

Bitcoin-Basics
3 Minute Read

What are the Bitcoin basics you need to know?

Key Points
  • When introduced, Bitcoin was worth $0.00
  • Bitcoin really kicked into gear in 2013
  • 2020 saw great growth

Bitcoin’s Beginnings

In 2009, Bitcoin was trading for next to nothing, but in the years since it has seen the price rise from pennies per coin to significant numbers – over $30,000 as of January 26, 2021. As a decentralized digital currency, without bankers gatekeeping, it’s considered truly democratic however there are critics. Some think that Bitcoin is more of a speculative bubble than a true currency of any sort, but there is not denying the interest it raises, from funding illegal activities to completely legal interest in the locating and mining of Bitcoin itself.

Operating as a peer-to-peer currency that can be accepted by anyone with a cryptocurrency wallet, the Bitcoin basics are simple to understand but can also be confusing to those without a background in cryptocurrency or finance. Bitcoin is just another way of paying someone for services rendered, and the transfer of value between Bitcoin wallets is a transaction. Mining produces Bitcoin, and block chain technology validates transactions on the whole.

Basics in Bitcoining

It may seem counterintuitive to some to utilize a new form of currency, but the trust that makes the whole Bitcoin, and cryptocurrency, system work is really the same sort of trust individuals have in national systems as well. Many cite the paperless, anonymous, borderless transaction as more democratic than the national basics of the systems countries currently use.

Transactions are fast, can be cheap, and are permanent, and you are able to exchange with any who accept the Bitcoin as a form of payment. As the first, and most popular, cryptocurrency, Bitcoin is decentralized, it’s up to users to “police” the transactions of Bitcoin. That’s where the blockchain comes in. Anyone can access the ledger that shows every transaction made using a particular Bitcoin. Once the transaction has been verified, it also gets added to the blockchain. This allows for complete transparency, but there is an element of anonymity to Bitcoin.

Bitcoin Basics And Retirement Planning

Bitcoin and other cryptocurrency can be held by certain retirement plans, for example, the Self-Directed IRA account. Alternative investments SDIRAs can hold and include not only Bitcoin and cryptocurrency, but also real estate purchases, and other items.

For example, IRA Financial is the first self-directed IRA company to allow their clients to invest in cryptocurrencies, such as Bitcoin, directly via a cryptocurrency exchange without the need for a third-party broker or the use of an LLC. 

From a Federal tax standpoint, Bitcoin is not treated like a currency. Traditional currency, or fiat, like dollars and euros, are treated differently than digital currencies. The IRS issued Notice 2014-21, which states, “Virtual currency is treated as property for U.S. federal tax purposes,” and “General tax principles that apply to property transactions apply to transactions using virtual currency.”

Therefore, The IRS treats the gains from the sale of Bitcoin as a capital asset. It is then subject to either short-term or long-term capital gains tax rates. Since Bitcoin is considered property, the IRS imposes extensive recordkeeping rules and taxes on its use. This means that your Self-Directed IRA may be able to purchase and hold Bitcoin as property, whether you have a custodian controlled account or checkbook control.

Vitally important in the possession of Bitcoin, or any cryptocurrency, really, is security. While the coins themselves are anonymous and private, it is possible to lose them, lose access to them or the drive they’re on, or forget the password for the account itself. Maintaining quality records is important in all areas of financial and wealth management.

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