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A wallet address, comprising a string of 26-35 alphanumeric characters, is all it takes to send and receive bitcoin. Any bitcoin address can be used to transfer cryptocurrency to any other address on the network, provided the sender’s wallet software supports that address type. With multiple address formats to choose from, and wallet providers and exchanges only supporting certain address types, it pays to familiarize yourself with the differences.
Address Formats Are the Internet Protocol of Bitcoin
Just as there are multiple versions of the Internet Protocol, such as IPv4 and IPv6, there are multiple bitcoin address formats. Most of the time, these don’t come into conflict with one another, with transactions zipping seamlessly across the network between custodial and non-custodial wallets. There are three Bitcoin Core address formats to choose from, P2PKH, P2SH, and bech32, with only a handful of service providers supporting all of them. There’s a good chance your preferred wallet or exchange doesn’t support at least one of these formats, with bech32 the likeliest to be omitted.
Learning the pros, cons and quirks of each address format will enable you to choose a compatible bitcoin wallet, exchange or platform. It will also furnish you with a deeper knowledge of Bitcoin’s inner workings, and reveal the trade-offs that come with each format in terms of security, flexibility and functionality.
P2PKH or Legacy Address Format
If your bitcoin address starts with a 1, you’re using a P2PKH or legacy address, for example 1BvBMSEYstWetqTFn5Au4m4GFg7xJaNVN2. This was Bitcoin’s original address format and it still works faithfully to this day. P2PKH, incidentally, stands for Pay-to-Pubkey Hash i.e pay to a hash of the recipient’s public key. Legacy addresses are not segwit compatible, but you can still send BTC from a P2PKH address to a segwit address without any problems. The average fee when sending from a P2PKH address is likely to be higher than when sending from a segwit address, however, because legacy address transactions are larger in size.
P2SH Address Format
P2SH addresses are structured similarly to P2PKH, but start with a 3 instead of a 1, for example 3J98t1WpEZ73CNmQviecrnyiWrnqRhWNLy. P2SH, which stands for pay to script hash, enables more elaborate functionality than legacy addresses. The P2SH script function is most commonly used for multisig addresses which can specify, for example, that multiple digital signatures are required to authorize the transaction. This address format is also used to enable non-native segwit transactions using a process known as P2WPKH-in-P2SH. The average person sending and receiving coins doesn’t need to concern themselves with the more complex functionality that the P2SH format can bestow: all that matters is that this address type is widely supported and can be used to send funds to both P2PKH and bech32 addresses.
Bech32 Address Format
Bech32 addresses look distinctly different from the P2-style addresses. Each one starts with “bc1” and is longer than a legacy or P2SH address on account of this prefix. Bech32 is the native segwit address format, and is supported by the majority of software and hardware wallets, but a minority of exchanges. Ledger and Keepkey wallets currently don’t support bech32, for instance, and while most exchanges enable sending funds to bech32 addresses, they don’t enable users to receive them with this format. At present, less than 1 percent of BTC is stored in bech32 addresses, although this number is increasing slowly.
Bitcoin Cash Address Formats
Bitcoin Cash addresses can follow either the legacy format (which starts with a 1) or more commonly the Cash Address (Cash Addr) format. It’s based on bech32 and starts with ‘q’ or ‘bitcoincash:q’. BCH wallets can support both formats, with tools enabling users to switch between Cash Addr and legacy formats. The primary reason for using the Cash Addr format is to distinguish BCH from BTC and thereby prevent funds being sent to the wrong address.
Which BTC and BCH address formats do you most commonly use? Let us know in the comments section below.
Images courtesy of Shutterstock and P2sh.info.
Need to calculate your bitcoin holdings? Check our tools section.
The post Everything You Should Know About Bitcoin Address Formats appeared first on Bitcoin News.
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The deadline for submitting tax returns in the UK is Jan. 31, 2019. If you hold investments in bitcoin or any other cryptocurrency it is important to be aware you may owe corporation tax, income tax, or capital gains tax depending on your activities. The U.K.’s HM Revenue and Customs (HMRC) has shared its most recent guidelines.
Get Ready, Set, File
The last 18 months have been quite a rollercoaster ride for cryptocurrency investors. There could be another dip ahead as the taxman will want his share of any profits made during the past tax year. Recently, there have been numerous reports emerging of tax authorities clamping down and going after cryptocurrency traders.
In the U.K., self-assessment is a system the HMRC uses to collect tax. So if you’re a sole trader or in a business partnership based in Britain and have made any gains investing in cryptocurrencies or have been sold an investment giving you exposure to digital assets, you may owe tax. Failure to report crypto gains could amount to tax evasion.
HMRC’s Guidelines on Crypto
Calculating taxes can be a complex and stressful process. Over the last couple of years, there has been a lack of clarity when it comes to bitcoin taxation. The latest taxation guidelines around cryptocurrencies from the HMRC aim to simplify the process of reporting taxable crypto assets.
A spokesperson from HMRC explained: “Where an asset including bitcoin is held as an investment as opposed to being working capital in a trading activity – the presumption is that any profit or gain on its disposal will be charged to capital gains tax.”
According to HMRC, a calculation is made for each “disposal” or transaction to establish where the disposal gave rise to a gain or a loss. At the end of the tax year, which runs from April 5, 2017 to April 5, 2018, the taxpayer must add together all of their chargeable gains and then subtract any in-year allowable losses. Any losses will be looked at on a case-by-case basis.
According to HMRC:
Whether any profit or gain is chargeable or any loss is allowable will be looked at on a case-by-case basis taking into account the specific facts. Each case will be considered on the basis of its own individual facts and circumstances.
Keep Records of Every Single Transaction
HMRC has explained that “if the overall result is a gain then capital gains tax will be due on this, after deducting any allowable losses brought forward from previous tax years and deduction of the annual exempt amount. If the overall result is an allowable loss then this can be carried forward to future tax years to set against chargeable gains.”
Another issue which arises is what happens if an individual has sold from one cryptocurrency to another, say from BCH to ETH. Would they only be taxed once they convert this crypto into pounds?
A HMRC spokesperson explained: “The tax treatment would depend on the particular circumstances, but where capital gains tax is in point the chargeable gain or allowable loss will arise when a cryptocurrency is sold or otherwise disposed of (example by exchange) for money or money’s worth … swapping bitcoin for ethereum or indeed sterling will involve a disposal of the bitcoin and any gain or loss on the bitcoin will accrue.”
HMRC has published a guide aimed at bitcoin miners, traders, exchanges, payment processors and service providers, to help shed light on the crypto taxation process.
Disclaimer: This editorial is intended for informational purposes only. Bitcoin.com and the author are not experts on taxes and cannot be held responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by following the information in this article.
What do you think of HMRC’s guidelines as detailed above? Let us know in the comments section below.
Images courtesy of Shutterstock.
Need to calculate your bitcoin holdings? Check our tools section.
The post What UK Bitcoin Investors Should Know as Tax Deadline Approaches appeared first on Bitcoin News.
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