Cryptocurrency has become all the rage in the last few years. Anyone managing their finances and investment portfolios has wondered how to make money with cryptocurrency.
Of course, the crypto boom has been powered chiefly by Bitcoin. As a result, if you want to make money using Bitcoin, it has never been more accessible. Here’s all you need to know about making money with this form of cryptocurrency, plus insights on how cryptocurrency and tax accounting work.
Cryptocurrency is a virtual currency that can be used to purchase goods and services or traded as a commodity. The latter is what the majority of people now use it for in their daily lives. Most people are familiar with Bitcoin but may not know there are over 10,000 cryptocurrencies on the market. Other popular options include Ethereum and Teether.
The concept of crypto is powered by blockchain technology and secured by cryptography, making it almost impossible to counterfeit. This decentralized technology manages and records transactions across a network of computers while maintaining enhanced levels of security. This upgraded security level is part of the appeal of cryptocurrency as is its decentralized nature which means it is not regulated by any centralized government or bank.
Using encryption technology, cryptocurrency can regulate the creation of currency units. It can also verify transactions for customers.
When asking, “how to make money off of Bitcoin?” it’s crucial to understand the commodity aspect and how it can be leveraged to make you money.
So, “Can I make money with Bitcoin, or is it just a fad?” This is the question most people new to this niche ask.
The answer is a resounding yes. People have become overnight millionaires from knowing how to make money with cryptocurrency.
Bitcoin is well-known for being extremely volatile and can spike by hundreds (or even thousands) of dollars in a few hours. No stock, bond, ETF, or physical commodity has this potential.
Likewise, the price can also plunge and wipe you out. This is what you need to keep in mind when you make money selling Bitcoin.
The main way to earn income with cryptocurrency is to trade it. But figuring out how to make money with Bitcoin trading is far from easy. It’s a high-risk investment and also has its own tax implications that a financial expert from Porte Brown can help you navigate.
Assuming you’ve already put everything into place to make money using Bitcoin, here are some of the most common strategies employed by traders.
By far the most common method for how to earn money with Bitcoin, you buy some Bitcoin and hold it until the market prices.
Be patient because you could be holding it for years if the market enters a downturn.
Although not available with Bitcoin, Ethereum, or most other popular coins, you can earn crypto dividends from holding certain coins in the same way as stocks. Some of these currencies include:
For the more technically inclined, you can operate a master node. The way it works is complex, but here’s a simplified version.
Node operators maintain real-time records on native blockchains. They verify new blocks of cryptocurrency exchanges and transactions but do not have to submit their new blocks to the network for verification. It’s important to note that a master node must operate on a collateral-based system. As a result, an operator needs to have a large amount of cryptocurrency to be a master node. This keeps the master node operator honest as they have a vested interest in the stake of the cryptocurrency.
Running a master node can be a challenging one. However, it’s also a great way to earn passive income as master noose operators earn cryptocurrency for their infrastructure work.
Day trading can also be done with crypto in the same way as other assets. Like with day trading stocks, crypto day trading requires great analytical skills to make it work. The reality is most people will lose money day trading unless they stick to their specific goals. Popular day trading strategies include:
Figuring out how to earn money with Bitcoin via day trading is even tougher due to the high volatility of the market.
Due to the lack of market regulation, exchanges determine their own prices. This can lead to price spreads of up to 30% when you compare exchanges.
Finding variations, or arbitrage as it’s known in sports betting, can allow you to capitalize and skim the difference off the top. You can do this by buying cryptocurrency from one market and selling it in a different market for more money. Because the market is unregulated, people can create their own exchange at any time. As such, there can be significant differences between asset liquidity and trading volume.
Arbitrage is a more in-depth strategy for how to make money with cryptocurrency.
Now that you know how to make money with cryptocurrency it’s important you understand the tax implications of doing so.
Cryptocurrency is treated as property by the IRS. As such, it is subject to the same basic tax rules as any other property. This may surprise you as many people believe cryptocurrency is viewed as currency on taxes.
That said, it’s best to familiarize yourself with the situations in which the selling or earning of cryptocurrency may be taxable. These include:
Of course, the actual tax amounts will vary depending on a number of factors including whether a gain or loss was capital or standard income. As cryptocurrency is still a relatively new form, the IRS is continuing to create and update the rules and regulations surrounding it. For instance, the Form 1040 tax form has changed its question surrounding digital currency in 2020, 2021, and more changes are expected in 2023.
Investing in crypto isn’t for the faint-hearted. There are major pitfalls, and not everyone is going to become that overnight millionaire, despite the stories. It can also be beneficial to work with a tax planning service for cryptocurrencies so you have the financial guidance you need in regard to tax and accounting work.
Approach crypto in the same way as investing in any other type of asset and avoid making these common mistakes:
Crypto should always be considered a high-risk asset, in the same way as penny stocks. Those enormous potential returns don’t come without risks.
The bulk of your portfolio should remain in reliable investment options, like stocks, bonds, and ETFs.
Cryptocurrency presents enormous opportunities to make money and transform your financial future.
Before delving into how to make money with Bitcoin, take the time to speak to your accountant and consult an investment advisor to make sure it’s the right move for you.
Get in touch with one of the leading CPA firms in Chicago, Porte Brown, to learn more about managing your finances and ensuring that you’re ready to confront the machinations of the markets.
Get in touch today and find out how we can help you meet your objectives.