Cryptocurrencies have existed for a little over a decade. Satoshi Nakamoto launched Bitcoin in 2009, and thousands of altcoins have followed Bitcoin’s path. These new assets have fewer regulations, and investors have more questions about these high-risk, high-reward investments. Political chatter about banning cryptocurrencies and witnessing different responses around the world can make crypto’s status seem confusing. We will discuss the legality of crypto and how it is regulated in the U.S.
What is Cryptocurrency?
Cryptocurrencies are digital currencies that store value. These decentralized virtual currencies have no central authority, giving investors more control. Some cryptocurrencies, such as Ethereum, have additional functionality beyond the storage of value. This popular altcoin forms the backbone of many NFTs and smart contracts. Cryptocurrencies rely on blockchain as their underlying technology, and it helps verify transactions on a digital ledger.
While cryptocurrencies have great potential and have already delivered incredible returns, many of them are speculative. Bitcoin, the original cryptocurrency, has endured many crashes to reach its current price. Bitcoin is more than 50% down from its all-time high, but long-term investors are no strangers to this trend. Mainstream cryptocurrencies have been resilient, while speculative cryptos have a more difficult time surviving market volatility.
Is Crypto Legal in the U.S.?
Crypto is legal in the United States, but it’s easier to trade crypto in some states than in others. New York has stricter rules than other states and is in talks to partially ban crypto mining. Mining proof-of-work cryptocurrencies like Bitcoin requires significant energy, which can hurt the planet. Bitcoin mining in the United States produced over 40 billion pounds of carbon dioxide in 2020, and the total global energy output for crypto exceeded Norway’s entire energy usage. Many cryptocurrencies are embracing the far less energy-intensive proof-of-stake model, including Ethereum, which is in the process of making the switch.
You can trade crypto in the United States, but you still owe taxes. In addition, you must report capital gains from crypto sales, something a broker can help you with if you trade on their platform. You will also have to report crypto income if you stake your crypto to others. Crypto staking is when you let someone temporarily borrow your crypto for blockchain verification purposes and receive a dividend-like payment for letting someone borrow your crypto.
What are Some Legal Concerns Surrounding Crypto?
Crypto is an ever-changing landscape. Some people want crypto banned, while others believe cryptocurrencies should become globally accepted and utilized. If you invest in crypto or are considering the asset, you should keep an eye on developments in these areas.
Cryptocurrency as Legal Tender
Many crypto enthusiasts dream of the day crypto becomes legal tender. This distinction would require merchants to accept payments via Bitcoin the same way you can make payments in U.S. dollars. Thousands of businesses already accept Bitcoin, but turning crypto into legal tender would force it into the mainstream. Turning crypto into legal tender could significantly increase prices and reward long-term investors.
The issue with crypto as legal tender is the asset’s volatility. Businesses happily accept payments in the U.S. dollar because it is a reliable currency. U.S. dollar holders do not have to worry about the asset rising or dropping by 20% within a few days. The product you bought for $10 today will likely be worth $10 the following week. However, something worth $10 in Bitcoin today may be worth $15 in Bitcoin the following week. Dramatic price movements can make it more difficult for merchants to consistently keep up with expenses. A strong month for crypto can help them cover more bills, but a crypto crash can also wipe out their businesses.
Accepting crypto as legal tender can also stretch into the more speculative currencies, such as Dogecoin and Shiba Inu. This creates extra layers of complexity and risk for business owners that many may consider unnecessary. Business owners already have a pathway to accepting payments via crypto, but turning crypto into legal tender would force every business owner to get on board.
Cryptocurrency Exchanges
Crypto exchanges make it easier to trade crypto. You don’t need a digital wallet, and you don’t have to worry about cold storage. While crypto exchanges have made crypto more accessible, you have to be careful. Some exchanges can lock you out of your fortunes by restricting deposits and withdrawals. These restrictions can feel especially stressful during a crypto crash or if you need extra funds for an emergency expense. Crypto does not have FDIC protection, so if your funds get wiped out because the crypto exchange went under, you won’t get any money back.
Crypto exchanges make it easier to trade crypto. You don’t need a digital wallet, and you don’t have to worry about cold storage. While crypto exchanges have made crypto more accessible, you have to be careful. Some exchanges can lock you out of your fortunes by restricting deposits and withdrawals. These restrictions can feel especially stressful during a crypto crash or if you need extra funds for an emergency expense. Crypto does not have FDIC protection, so if your funds get wiped out because the crypto exchange went under, you won’t get any money back.
You should work with a reliable crypto exchange with multiple years of experience. It also helps if the exchange doesn’t rely on crypto.
Cryptocurrency Use
Cryptocurrencies can help you pay for goods and services, just like any other currency. However, crypto’s anonymity makes them the desirable currency for cyber thieves and money launderers. It’s more difficult to detect the identity of a crypto holder, but governments have identified people behind malicious crypto transactions in the past. Crypto makes it easier to engage in illegal behavior. Still, the government has the resources to identify and bring justice to people involved in fraudulent activity, but crypto puts unnecessary hurdles into the mix.
Cryptocurrency and Taxes
You still owe taxes on your crypto. You would pay the short-term capital gain tax rate if you held crypto for less than a year before selling. Investors get a more favorable long-term capital gains tax rate when holding onto crypto for over a year. You also owe income taxes on any money you earn from crypto staking.
A significant distinction crypto has over other investments is the lack of a wash sale rule. The wash sale rule prevents investors from writing off losses if they repurchase the same position within 30 days. This prevents people from selling stocks with huge losses and only repurchasing the same position a few minutes later and expecting to get a write-off. For example, you can sell Bitcoin at a loss, buy the same amount of Bitcoin a minute later, and still get to write off the capital loss. The wash sale rule prevents stockholders from participating in that behavior and getting the tax advantage.
Cryptocurrency Fraud and Money Laundering
While every currency is subject to fraud and money laundering, it’s easier to pull off those acts with crypto. The anonymous nature makes it more difficult to track down bad actors. Anonymous crypto transactions offer more protection to everyone, but it gets problematic when fraudsters abuse those protections. The government has found and arrested people who engaged in crypto fraud and money laundering. Crypto makes it more difficult to discover, but it’s not a blanket of immunity.
Cryptocurrency Regulation in the U.S.
The U.S. government turned a blind eye toward crypto until the dark web used crypto as its preferred currency. The Silk Road, an infamous site on the dark web, made over $1.3 billion via crypto transactions in two years, prompting many of the current debates around crypto. New York became the first instance of state-level crypto regulations, requiring businesses to fulfill set criteria to buy, sell, and store crypto. Wyoming and Texas are among the friendliest states to crypto investors. These states recognize crypto as legal money. Last year, Miami made progress in allowing workers to receive wages and pay taxes with Bitcoin.
Future Cryptocurrency U.S. Regulations
Broader acceptance of crypto among consumers and business owners will pose more regulatory challenges in the future. Officials will have to educate the general public on crypto risks and ways to avoid scams. This continued acceptance and using these digital assets as a medium of exchange is blurring the lines between crypto’s status as a commodity and security. Any changes to the distinction can impact how Bitcoin gets taxed.
Cryptocurrencies have many fraudsters, but advanced technology can fuel innovative companies and offer useful services. Regulators will have to navigate around malicious actors as they help guide crypto to its full potential.
How Cryptocurrency Regulations Can Impact You
Cryptocurrency regulations will only impact you if you buy and sell crypto. If cryptocurrencies get banned in more locations, asset prices can decline. However, crypto stands to gain immensely if it gets accepted as legal tender. Favorable regulations that promote crypto as a mainstream currency will increase crypto’s price and reward long-term investors.
