Bitcoin might be a hot commodity nowadays, but many people – as well as regulatory entities like the government – still don’t understand quite how it works. In fact, its very benefits (such as anonymity) are usually the same reasons that put folks who want to dabble in them in hot water.
If you’re new to this digital currency, you might find yourself asking: is bitcoin legal?
*Note: most of the information and examples on this page will concern bitcoin holders in the U.S. For a general view of how other countries view bitcoin, see this guide.
Common Bitcoin Legal Issues
To get straight to the point: bitcoin is legal.
But due to its very nature and how it works, authorities are generally concerned about its ability to be used anonymously. After all, criminal activities such as money laundering thrive on such environments.
Another apprehension is its decentralized nature. As no one entity regulates it (rather, the entire bitcoin network is responsible for one another), there is little to no assurance for those invested in the currency.
Bitcoin’s legality will depend on three key things:
- Is it even recognized in your COUNTRY to begin with (see this handy guide to verify)
- WHO you are (e.g. a miner, end user, merchant)
- HOW bitcoin is going to be used (e. online shopping or illegal gambling)
If you’ve nailed them down – you’re 100 percent sure it’s legal in your country, and you just want some bitcoins to buy some socks on Overstock.com – then there’s nothing to worry about. Just make sure to double check so you’re never in the gray area. In the U.S. for instance, while digital currencies is legal, there are still specific rules to follow depending on your state.
One of the main bitcoin legal issues has something to do with its value. While bitcoin and similar digital currencies can be used to buy goods online (or in select retail establishments), a good number of users prefer to exchange their share for cash (or fiat currency).
This opens up questions such as:
- With bitcoin’s fluctuating values, how much will you get if you ‘cash out’ now?
- What if a hacker ‘intervenes’ during an exchange? Can you get your bitcoins back?
- Can the government shut down online exchange platforms?
- When is an exchange platform considered ‘illegal’?
- What will happen to bitcoins that are confiscated?
Verifying the legality of bitcoins in your country, using trusted exchange platforms (like Coinbase), and taking extra security measures (e.g. backing up your privates keys) are just a few suggestions to protect you from issues that might pop up when you’re converting bitcoins to fiat.
Even if you were able to successfully exchange your bitcoins to the currency of your choice, your next problem could be how it’s going to be taxed.
Just because no central figure controls or owns bitcoin doesn’t mean it’s not subject to state and federal laws. Plus, as all transactions are transparent thanks to blockchain technology. Authorities can simply check the network to see all bitcoin transfers.
For U.S. tax purposes, bitcoin and all virtual currency are ‘treated as property’ – NOT as currency. Similar to when buying real estate for instance, there are three main aspects a bitcoin user needs to understand:
- Acquiring the property (getting bitcoins)
- Holding the property (storing bitcoins); and
- Disposing of the property (selling bitcoins OR exchanging it for goods and services)
Take note that ALL bitcoin transactions are taxed. Whether you’re a miner, user, or merchant, it’s important that you keep all records pertinent to your exchanges. Incomplete records amount to NO records. This could get you into hot water with the IRS.
New tax laws might present opportunities for those dabbling virtual currency though.
For example, under section 1031, capital gains taxes are deferred for ‘like-kind exchanges’ of property. However, experts warn bitcoin users about taking advantage of this ‘loophole’ as in the instance of selling their bitcoins for etherium.
But other aspects of the new tax law seem to be promising, such as lower corporate tax rates (traders who hold virtual currency for shorter durations) and pass-through deductions (for bitcoin miners).
*Please see the official IRS notice on virtual currency here.
In essence, digital currencies like bitcoin and regulations surrounding them are highly controversial. The fact that it’s being taxed for instance, seems to go against bitcoin’s original intent of being an ‘independent currency’. But on the other hand, users could also use some form of protection for their bitcoins (especially if they were bought using hard-earned cash).
Authorities around the world are mainly concerned with bitcoins being used for illegal activities, such as money laundering or terrorism acts. It can’t be denied that its anonymity and convenience (coupled with its soaring value) attract thousands of users around the world – most of whom don’t have the best intentions at heart.
But could regulating virtual currency truly help solve some of its main concerns, such as:
- It can be used for criminal and enterprises.
- There’s little to no protection regarding virtual currency fraud or hacks.
- As virtual currency carries no value but instead, is a value in and of itself, it can be volatile and be subject to market manipulation.
- Many of the current regulations surrounding it are often vague or provide little guidance for those interested in the new venture.
Whether or not the public agrees that bitcoin and similar digital currencies should be regulated, the decision will still fall on governing bodies. Thus, those dabbling in them are subject to existing laws and policies.
*Disclaimer: The information in this blog post (“post”) is provided for general informational purposes only and may not reflect the current law in your jurisdiction. No information contained in this post should be construed as legal advice, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this Post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country, or other appropriate licensing jurisdiction.