Bitcoin is a virtual currency that’s not backed by any national government that is gaining in popularity. While most notably used for black-market transactions, some companies, such as Virgin Galactic and Expedia, now accept bitcoin for regular purchases. While most banks warn against the currency, so far, US authorities have taken a hands-off approach to the currency.
Bitcoin is a digital currency, so instead of paper money, you’ll create an address that is linked to your digital wallet. You’ll also use this address to make payments or collect money. Unlike email addresses, bitcoin addresses are unique to each transaction. Bitcoin is a block chain currency, which is a cryptographic public ledger that records all confirmed transactions and against which your bitcoin wallet calculates your balance. Transactions are completed using a public-private key pair. Your bitcoin wallet has the private key, which signs a transaction and creates the public key from the transaction data using a mathematical formula. If any bit in the transaction is edited, the public key will not work to open and complete the transaction. Your transaction goes out through the bitcoin network and, during the next few minutes, begins the process of mining.
Mining is a bit of a deceptive term because what it actually means is that transactions are being verified and added to the block chain. The process puts transactions on the block chain in the order in which they were initiated and then shares that information back to the network. Transactions are “packed” into a block on the block chain by a cryptographic algorithm designed to keep the network neutral and keep previous blocks from being modified. No one in the network is able to control the block since any added transaction must be agreed to by the entire network. This entire process is designed to allow transactions to occur without a middle-man, such as a bank, controlling the process.
Block chain technology may be the future of legal as well as financial transactions as it can be applied to any kind of transaction that could be handled digitally but needs to be secure and verified. That, however, is something to explore in the future. For now, your business can choose to accept bitcoin as payment, just as you could accept payment in gold or foreign currency. Bitcoin has a current market rate at any given time that your merchant services provider can calculate or you can look up online at Bitcoin Prices. When it comes time to pay your taxes, treat bitcoin transactions as you would cash transactions and pay your taxes accordingly. The IRS says to treat Bitcoin as you would a general property transaction.
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