How to Use Bitcoin

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. Learn what it is, how to buy it, how to use your holdings, and everything else you need to know.

Key Takeaways

• Bitcoin was the first major cryptocurrency, 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 as 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.

Understanding Bitcoin

Bitcoin is a type of cryptocurrency created by an anonymous individual or group known as Satoshi Nakamoto in 2009. It’s just one of the many types of cryptocurrency, which are digital currencies that exist on decentralized finance networks using blockchain technology.

Note

Bitcoin and other cryptocurrencies aren’t a form of currency, nor are they recognized by regulatory authorities. Instead, according to the U.S. Commodity Futures Trading Commission, they are considered a commodity. The Internal Revenue Service, 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—you can buy goods and services or make international transfers.

Since it started trading, Bitcoin’s price has experienced spectacular growth but also incredible volatility. For example, in 2017, bitcoin reached $1,000 for the first time and rocketed to more than $19,000 by the end of that year; a year later, it crashed to nearly $3,000. In October 2021, the cryptocurrency set new highs when its price went past $66,878.

Choosing a Bitcoin Wallet

If you decide to invest in bitcoin, you’ll also need to find a cryptocurrency wallet. Unlike traditional currency, you don’t 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. You can choose between a hot or cold cryptocurrency wallet.

Hot Wallets

A hot wallet exists online or connects to the internet. You can find hot wallets on websites or mobile apps. The benefit of a hot wallet is that you can easily access your cryptocurrency with your phone or other devices. However, hot wallets are also more vulnerable to hacking because they are online.

Some of the hot wallets that you can use to store your Bitcoin keys include:

• Electrum
• Exodus
• Mycelium

Cold Wallets

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 said, you run the risk of losing your hardware and access to your bitcoin along with it.

Some of the cold wallets that you can use to store your Bitcoin keys include:

• Ledger Nano S
• Ledger Nano X
• Trezor Model T

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. There are several exchanges, but some of the most popular ones include Coinbase, Kraken, Binance, and Gemini.

Note

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. However, there are still plenty of places you can 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.

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.

Note

When you use a cryptocurrency debit card, your cryptocurrency is automatically converted into dollars.

If you’d rather not directly spend 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 retailers with bitcoin. 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 accept bitcoin as a form of payment. Some large online retailers like Overstock and Newegg accept bitcoin.

There are also ways to use bitcoin for purchases at merchants that don’t accept it. For example, Flexa is a payment network that supports many different currencies, including cryptocurrencies. When you use the Flexa payment network and its mobile wallet SPEDN, you can pay in any supported currency, and it will be converted at the time of the purchase. Although it has a $750 spending limit per week, Flexa is accepted at many major retailers in the United States, including Nordstrom, Lowes, and Petco.

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 converting bitcoin to dollars is selling an asset; you will need a W-9 on file with PayPal to use this feature.

Note

If you aren’t sure what retailers accept bitcoin, you can use online search engines to find 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

Bitcoin’s price changes throughout the day as supply and demand affect the market. If you watch the bitcoin price, 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.

Note

Unlike credit cards, cryptocurrency payments do not come with legal protections and may not be reversible, making it difficult to dispute charges.

For instance, suppose you had $100 worth of bitcoin in your cryptocurrency wallet and wanted to buy an item that costs $100. You placed the item in your cart and proceeded to check out. Unfortunately, you received a notice saying you had insufficient funds for the transaction. But what happened? You had enough when you added it to the cart.

This is likely due to fluctuating prices. It’s not unheard of for bitcoin prices to drop a few cents quickly. If prices drop between the time you move an item to your cart and the time you click on the purchase button, you may not have enough bitcoin to spend.

How Bitcoin Is Taxed

If you’re going to invest in bitcoin or another cryptocurrency, you must understand how you’ll be taxed. According to the IRS, bitcoin is considered property rather than a currency. As a result, when you sell it, your gains are subject to the capital gains tax. 

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. However, 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.

Note

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 on the amount you spent if that amount was an increase in value from the date you acquired the bitcoins.

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.

How can I get bitcoin?

You can get bitcoin by purchasing it, accepting it as payment for goods and services, mining it, or as a gift. Many apps and services will help you acquire bitcoin. Some function like brokerages with an emphasis on charting and trading bitcoin price movements. Others are like payment services that allow you to transact in bitcoin as well as U.S. dollars.