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By Anna-Louise Jackson
April 28, 2021
A person is pulling out bitcoin from the wallet, looking to spend it.
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Laszlo Hanyecz became the first known person to make a payment using Bitcoin when he bought two pizzas in 2010. In the decade-plus since then, the world’s largest cryptocurrency has been associated more with being a speculative investment opportunity than a viable form of payment.

But Bitcoin has increasingly become a popular, and practical, way to spend money. The average number of daily confirmed payments with the digital coin more-than doubled between April 2018 and April 2021, based on data from Blockchain.com. And in 2021, Tesla and PayPal began accepting Bitcoin as payment in the U.S., joining a growing number of companies that already did so — like AT&T, Microsoft, Overstock and Expedia.

By making it easier for Bitcoin investors to become Bitcoin spenders, people can use the digital coin to pay for big purchases, like a new car, or small ones, like home decor. Long-time Bitcoin investors watched the cryptocurrency’s value surge more than 100-fold in just five years, which potentially gives them more buying power.

And people could have even more places to spend the digital coin in the not-so-distant future. The Covid-19 pandemic fueled a shift toward digitalization that saw a rapid adoption of crypto payments, according to Bloomberg’s crypto analysts.

For now, it’s still much easier (and faster) to pull out a credit card or cash when it comes time to pay at the store. But it’s possible to spend Bitcoin, you just need to be aware of some fine print.

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How to use Bitcoin

Bitcoin is becoming a more popular payment option thanks to companies that embrace its use and consumers who push for its adoption. It’s not just the large publicly-traded companies that accept cryptocurrency; about 2,300 small businesses in the U.S. accepted Bitcoin as of December 2020, according to Fundera. And 57% of Americans want brands to start accepting cryptocurrencies more broadly as payment, according to a Piplsay survey conducted in February of more than 30,000 adults.

Bitcoin is best used as a digital form of payment. Like other cryptocurrencies, the blockchain offers transparency in recording a ledger of payments, and you have full control over your transactions and more anonymity.

Because most companies don’t accept Bitcoin payments directly, you’ll need a "digital" or "Bitcoin" wallet that securely stores your balance. These Bitcoin wallets — which include mobile apps, desktop or online software and hardware (USB device) — allow you to make transactions through both an alphanumeric code and QR code.

How to find sellers that take Bitcoin

Armed with a Bitcoin wallet, you can then spend your Bitcoin balance on anything you want at participating merchants. That list of items is now pretty broad, ranging from groceries, travel and yes, even the kitchen sink. There’s a search engine where you can type in what you’d like to buy with Bitcoin and then find a list of stores and businesses that accept the cryptocurrency. What’s more, nonprofits like Wikipedia and some charities also use Bitcoin to accept donations.

Overstock was an early adopter for accepting Bitcoin payments, and you’ll see the option to pay with the cryptocurrency at checkout. Meanwhile, Microsoft allows customers to add Bitcoin to their accounts to pay for items in its online store.

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How to use Bitcoin debit cards and gift cards

Although the world’s largest retailer, Amazon, doesn’t accept Bitcoin payments (yet), there are two relatively easy work-arounds: debit cards or gift cards.

Bitcoin debit cards are debit coins that are loaded with the cryptocurrency, allowing you to spend money anywhere debit cards are accepted -- even if the cryptocurrency isn’t. The perk of these debit cards is that you don’t have to convert Bitcoin into the local currency. Various companies, including BitPay and Coinbase, offer Bitcoin debit cards (and some even support a variety of other cryptocurrencies).

Similarly, you can also spend Bitcoin using gift cards. By buying a gift card with Bitcoin from various services, you can spend that money at retailers that don’t accept cryptocurrencies yet. Alternatively, you can also convert gift cards you don’t want to Bitcoin. Perhaps unsurprisingly, there’s a fee associated with these types of gift cards. One such provider, Crypto Voucher, charges a 4% service fee plus a crypto withdrawal fee that is capped at $3 per transaction.

Because Bitcoin payments differ from traditional currency, the process may be confusing for some people, which is likely why Tesla has a lengthy Q&A detailing how to pay with Bitcoin. You’ll need to know the Bitcoin equivalent price for a Tesla product and then enter the exact amount — or your order might get cancelled. The car maker also cautions that if you overpay, you might not be able to get an amount refunded, and that transactions can take up to six hours to complete.

Why is it so hard to spend Bitcoin?

Bitcoin, and other cryptocurrencies like Ethereum, are actually an asset rather than a currency. The value is derived primarily from how market participants value each cryptocurrency, rather than being backed by a government or tied to the value of a commodity, like gold.

Bitcoin appeals to investors for a variety of reasons: It’s not managed by a central bank and is a decentralized form of currency, it’s a completely digital way to store value, it allows for secure and anonymous transactions, and it’s an alternative asset that has some degree of novelty.

The value of cryptocurrencies can fluctuate wildly over very short periods of time, meaning they’re more speculative as investments — and skeptics argue this also makes them less viable as a form of currency. Just consider this year’s rally and consider how difficult it would be to price something exclusively in Bitcoin if its value effectively doubled in a matter of months.

Because of the speculative nature of Bitcoin and its associated volatility, experts recommend that it should constitute no more than 5% of the total value of your portfolio. The biggest risk, of course, is that you’ll lose money on your initial investment. And for those people who intend to spend Bitcoin, there’s the additional uncertainty of how price fluctuations will affect the amount you pay for a good or service.

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How to use bitcoins when the price of Bitcoin is moving

Just like buying goods in a foreign country, there’s an exchange rate for purchases made with Bitcoin. Tesla notes that there’s a timer for completing payments, and if that time runs out, the Bitcoin price might be updated. As a result, the slight lag time in processing a payment on an especially volatile day could work to your advantage or disadvantage.

Given this type of volatility, it’s important to have a good understanding of the risks before investing in or paying with Bitcoin. To some people, those risks will be part of the appeal, while they’ll dissuade others from getting into the crypto space at all. The good news is that there are other ways to invest in companies in Bitcoin-adjacent industries, such as those companies that accept the cryptocurrency for payment or offer other blockchain services.

How Bitcoin is taxed

The IRS taxes Bitcoin (and in fact all cryptocurrencies) just like other investments, such as stocks and bonds. That means that the length of time you own the asset will affect the capital gains tax rates for trading profits. If you held the asset for less than a year, the tax rate is the same as ordinary income. If you held it longer than one year, the long-term capital gains tax rate is lower (currently ranging from 0% to 20%), and depends on your income.

But here’s what may not be as obvious: Spending Bitcoin means you may also get hit with taxes — for both the buyer and seller — because it’s considered property rather than a currency. According to the IRS, you could have a capital gain (or loss) if the fair market value of property you purchase exceeds (or is less than) the adjusted basis — i.e. the price at which you bought — of the virtual currency. And sellers must include the fair market value of the virtual currency when computing gross income.

The tax implications associated with Bitcoin may not dissuade diehard crypto fans, but they’re an example of the fine print to be aware of when investing in a new-to-you asset. Because even if the projections for Bitcoin pan out this year, and its value is headed higher and higher, the IRS will want a cut of the action.

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