Bitcoin was the first cryptocurrency to come into existence and is based on a set of ideas put out on a white paper published by an anonymous developer or group of developers going by the name of Satoshi Nakamoto. Bitcoin seeks to lower transaction fees when compared to traditional online money transfer mechanisms and is controlled by a decentralized or distributed network, unlike traditional currencies that are controlled by banks.
Bitcoins use a network of computers to authenticate transactions, thereby, making them highly accurate and secure. The underpinning technology that powers Bitcoin is known as Blockchain, which is a type of distributed ledger. Blockchain stores sets of transactions in blocks and these blocks are linked to one another through strong cryptography. The fact that the system uses strong cryptography to secure transactions and is based on a distributed network gives it some unique features that do not exist in traditional currencies. Let’s take a look at a few Features of Bitcoin.
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Features of Bitcoin
One of the main features of Bitcoin is that it is based on a Decentralized system. As Bitcoin uses a network of computers to authenticate and complete transactions there is a much lower chance of catastrophic failure within the system, as there is no single point of control and other computers on the network can compensate for any loss in computing power.
Bitcoin is based on the Blockchain network. Blockchain is a public ledger that records all legitimate transactions between members of the network. This ledger can be accessed by anyone on the network to view transactions on the network, giving Bitcoin an unmatched level of transparency.
Bitcoin seeks to minimize transaction times. Bitcoins can be transferred between members of the network in seconds and transactions are authenticated almost instantly. Regular bank transfers can take a few days to complete.
Tax on Bitcoin
For the purpose of tax, the IRS has deemed cryptocurrencies/virtual currencies to be considered property and, therefore, any gains made from transacting in Bitcoin will be considered capital gains. Buying Bitcoin using FIAT currencies like the US Dollar is not considered a taxable event, but using Bitcoin to buy something is considered a sale of property, and any gains made during the sale of property are considered a taxable event.
If you hold your Bitcoin for less than a year before using it for a transaction, if there are any gains in the value of your Bitcoin at the time of sale, this will be considered short-term capital gains and will be taxed as ordinary income tax. But if you hold the Bitcoin for a period longer than 1 year before transacting with it, in case of any gains, they will be taxed as long-term capital gains which carry a lower tax rate. Both gains and losses are reported on the individual income tax return you file at the beginning of the year.
Bitcoin Tax Software
Calculating your crypto taxes on Bitcoin can be quite a cumbersome task as you will need to record the price of the Bitcoin at the time you bought it and the price of the Bitcoin at the time of selling it. You will also need to keep a track of how long you have held each Bitcoin and this can become quite a tedious task if you’re looking at thousands of transactions.
Due to the immense amount of time it takes to record all these variables to compute your tax liability companies have developed Bitcoin Tax Softwares that will help you compute the tax liability on your digital assets within minutes. There are a number of Bitcoin Tax Softwares on the market today, so we have created a list of our picks for the best Bitcoin Tax Softwares.
Top 5 Bitcoin Tax Software
Koinly is one of the smartest Bitcoin tax software on the market. This software calculates your total Bitcoin tax and will also help you reduce your tax liability on your digital assets by making a few changes to your crypto portfolio. Koinly is connected to almost every major crypto exchange and allows you to use your exchange API keys and blockchain public address to import all your transactions in one shot. The software will also create accurate tax reports with complete audit logs.
BearTax is considered one of the most trusted Bitcoin tax software on the market. The software allows you to import transactions for almost any exchange across the planet into one place using APIs and file uploads. BearTax allows you to review your transactions and assign the right prices to them and process them using FIFO or LIFO. The software will also generate all the relevant tax documents that you can send to your accountant or use in your favorite tax software.
CoinTracker is one of the most comprehensive Bitcoin Software on the market today. The software allows you to directly connect to all exchanges, wallets and DeFi platforms and automatically updates all your crypto transactions and balances. The software does more than just track your transactions, it can be used as a Bitcoin Tax Software to generate tax reports in minutes. CoinTracker has partnered with TurboTax to make the filing process seamless.
Blox is an online crypto tax software that can do a lot more than just calculate your crypto tax for you. This online software can sync with unlimited wallets and exchanges to automatically collect your transaction data on time. The software also has a real-time dashboard that will provide you with information pertaining to your balances, asset performance, historical data, and analytics.
ZenLedger is one of the most user-friendly Bitcoin tax softwares on the market. This powerful online tool can do everything from allowing you to import all your transactions to one place in one click to filling out tax forms like 8949 and Schedule D. ZenLedger is an IRS compliant software and will produce profit and loss statements that can be easily understood by you or your accountant. The software can also generate capital gains reports, donation reports, income reports, and closing reports for you with the click of a button.