Is Investing in Cryptocurrency Legal

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PUBLISHED ON Jul,22 2021

Introduction

It is impressive how cryptocurrencies have managed to stay in the spotlight for the past few years. The lucrative digital coin trading landscape is still evolving and adapting to changing regulations. With high user base growth, there is more optimism towards cryptocurrency exchanges.

Of course, the digital currency boom didn’t take place overnight. In fact, it was a long journey for cryptocurrency like Bitcoin to thwart myths and misconceptions associated with virtual coins. With the mainstream investment and open discourse about cryptocurrencies, regulatory agencies and central banks want to redefine what constitutes a digital currency.

Uncertainty and Popularity of Cryptocurrencies

Search on Google and you’d find hundreds of stories of independent investors who managed to make a huge amount of money by investing in cryptocurrency space. But most investors are uncertain about the future of virtual coins because of different legal risks to sell and buy cryptocurrencies.

Originally, cryptocurrencies were supposed to function without a legal framework from any country or state. But the tide of the capitalism is changing and cryptocurrencies are at the center of it. The U.S. governments have realized the true potential of virtual currency and blockchain in the coming years. But since the federal government is not involved, states follow a combination of new and old regulations for cryptocurrency exchanges.

Let’s take a closer look at legal implications related to investing in different cryptocurrencies:

Classification of Cryptocurrencies

The IRS views all cryptocurrencies as property in the U.S. It triggers the traditional tax laws on capital gains for investors. Plus, investors also have to report their cryptocurrency profits and expenses on annual tax returns.

But “where” you purchased your digital coins leads to more legal considerations. One report highlights that any individual with up to $10,000 overseas has to submit the report of FBAR (Foreign Bank and Financial Accounts) to the Treasury Department every year.

According to FATC (Foreign Account Tax Compliance Act), some American taxpayers will have to explain their international accounts on the “8938 Form” at the time of filing annual taxes to the IRS. Financial experts argue that the IRS has managed to befuddle U.S. investors because of uncertain and vague laws.

In any case, cryptocurrency investors need to exercise utmost caution and follow changing guidelines about reporting cryptocurrency losses and profits. As an investor, you should also seek the guidance of tax professionals to avoid potential hefty penalties. Besides, the last thing investors should do is generalize existing laws. After all, the legal rules and permissiveness around cryptocurrencies are changing constantly.

Decentralized Status Equals More Value

Thanks to Bitcoin, there is a more streamlined investment in cryptocurrencies and awareness about decentralized platforms. It continues to amaze crypto investors that governments can’t enforce their regulatory power in digital currencies.

Unlike traditional currencies, cryptocurrencies don’t involve any federal jurisdiction. Unfortunately, this status creates legal issues for crypto investors. In the worst-case scenario, investors are left at the mercy of following traditional taxation laws.

Ideally, there should be a central and authoritative backing for all cryptocurrencies. Since cryptocurrencies revolve around a decentralized platform, the legal alternatives are different for different situations.

Changing Business Registrations & Licensing

You’d be surprised how many businesses leverage cryptocurrencies to allow users to make payments. But now businesses have to register and get multiple licenses for crypto-based payment services they offer. As of now, this legal area is not clear because of the changing complexity of cryptocurrencies.

On the bright side, businesses that accept large payments in the form of a cryptocurrency may not have to register or get multiple licenses. When it comes to legality of digital currencies, the burden of responsibility lies on the shoulders of managers and business owners to ensure state and local level operations align with legal processes. For instance, financial institutions now have to consider the protection against fraud, illegal funds transfer, or money laundering in cryptocurrency exchanges.

Will Legal Issues Limit the Growth of Cryptocurrencies?

Contrary to naïve misconception, cryptocurrencies is not a door to indulge in money laundering and fraud activities. It would be fair to state that legal parameters to invest in cryptocurrencies will continue to change. Still, it doesn’t change the fact that crypto has become a class asset that will garner the attention of more global investors for years to come.

Final Thoughts

Financial analysts also believe that regulating the crypto trade will serve a purpose but regulations shouldn’t hinder or discourage investors to invest in the cryptocurrency landscape. Similarly, IT professionals concur that there are bound to be hacking and data loss issues. The solution is to roll out more effective initiatives and applications to minimize hacking, scams, and malware attacks.

It is unlikely, but if the federal government decides to impose strict regulations on decentralized digital coins, then investors would have to face huge losses. Fortunately, the big picture suggests that cryptocurrencies are moving in the right direction.

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