What is Bitcoin?

Bitcoin is a form of money that is entirely digital.  In other words, if the U.S. has dollars, and Europe has Euros, the internet has bitcoins.

But the fact that bitcoin is digital isn’t the most interesting thing about this type of currency.  In fact, economists estimate that 92% of all money is digital, no matter what currency we’re talking about.  So what makes Bitcoin so interesting is that it’s decentralized.

No single nation, bank or institution controls bitcoin.  While it was first invented by developer Satoshi Nakamoto, the bitcoin currency is administered and propagated by Bitcoin users.

How Does Bitcoin Work?

Bitcoin works a lot like a regular currency.  You can buy and sell digitally, of course, but you can also use bitcoin to make “real life” purchases if the vendor accepts bitcoins.  The first such “real life” purchase using bitcoin was in 2010, when a man bought two pizzas for a whopping 10,000 BTC (Bitcoins).

You can invest with bitcoin, exchange your bitcoins for other forms of currency, transfer bitcoins, etc.  But people can also create new bitcoins through a process called mining.

This is where bitcoin’s decentralized system becomes super interesting.  Rather than a large bank or financial institution printing more money, anyone can mine new bitcoins.

Mining involves using computational power to solve complex mathematical problems in order to validate other bitcoin transactions that have occurred within the network of Bitcoin users.  This system of peer-validation is the bedrock of the revolutionary blockchain technology that makes bitcoin so secure and allows for direct peer-to-peer value transferring.  It is also the linchpin of the bitcoin system from the perspective of Bitcoin creation.  For every “block” of transactions successfully validated in this way, the miner is rewarded with new bitcoins.

Is Bitcoin Legal?

Yes.

Bitcoin has a bit of an infamous reputation based on its ability to be traded securely and anonymously without the regulation of a centralized institution.  It has been associated with money-laundering and illegal purchases on the deep web’s black market, but this doesn’t mean bitcoin isn’t legal.

That said, as with all currencies, bitcoin is illegal when you purchase illegal things with it.

How Can I Earn Bitcoins?

There are a few main ways to get into the bitcoin market.  The first of these is mining.

Mining, as mentioned above, is the process of solving complex mathematical problems available to anyone in the bitcoin network.  This is win-win for both the miner and the network at large.  The miners provide transaction validation for the network and are, in turn, rewarded with bitcoins.

Just how much can you earn from mining?  Well, that depends.  In 2009, you could earn 50 BTC per “block” mined. However, today it’s considerably less … 12.5 BTC.  Also, these mathematical problems are more difficult to solve than anything you may have encountered in high school calculus.  You need specialized computers to tackle these problems, which is a significant investment.

For more on how to get started mining, check out this helpful guide.

You can also get bitcoins the old-fashioned way: by working for them.  There are lots of job postings that pay in bitcoins on the Internet, but a good place to start looking would be on Reddit, which has one of the most popular message boards for jobs paying in BTC.

There are other ways to get bitcoins as well, though some of these can involve high risks, such as gambling, online gaming and currency trading.  More on these techniques here.

Do I Have to Pay Taxes on Bitcoin Earnings?

The IRS will view your bitcoins as property rather than currency, meaning that every transaction you make within the Bitcoin network will affect your capital.  In addition to this, if you are paid in any crypto-currency (virtual currencies, of which bitcoin is just one kind), this income will be taxed.

In many ways, bitcoins are subject to the same tax laws as regular currencies.  Business transactions in bitcoin are not exempt from regulations or rules regarding reporting and sales tax.

If you’re dealing a lot in bitcoin, check with your accountant. But the general rule is to keep accurate and thorough records because your Bitcoin income will need to be reported as part of your gross income. It must also be recorded in U.S. dollars at the exchange rate it was valued for at the time of the transaction.