What’s legal and what isn’t?
Throughout the world, regulators are attempting to wrap their heads around the idea of digital currency and determine where and how it fits existing legalities regarding currency systems. The legitimacy of Bitcoin depends upon your identity, where you are on the planet, and what you’re doing with it for the most part. Every fiat currency is created, released and controlled by a central authority – and ordinary citizens are not permitted to create a currency.
Bitcoin is a completely new and unique paradigm because it is the world’s first digital, decentralized currency that no one, no government, no central bank controls. Anyone with enough computing power can create coins simply by being an active part of the Bitcoin community. Clearly, this causes quite a struggle on the part of many jurisdictions and authorities to understand or define Bitcoin in legal terms.
In a Nutshell
While authorities struggle to understand Bitcoin, the rest of us can take advantage and profit from early adoption of this emerging technology. Doing so means understanding the limitations and legalities in your locale. We are primarily focusing on the United States – our home country.
Buying Goods with Bitcoin
Buying goods and services with Bitcoin is completely legal. The US Treasury FinCEN has issued guidance documents in which it is stated that those who obtain units of virtual currency and use it to purchase goods are not considered money transmitters and are operating within the law. There are numerous online retailers, service providers, and marketplaces that accept cryptocurrencies as payment.
Now, if you use Bitcoin to buy illegal goods, then you’ve stepped outside the bounds for use of any currency.
Investing in Bitcoin
US-based exchanges that comply with the Anti-Money Laundering and Know Your Customer policies outlined by FinCEN are permitted to offer legal trading and investment services to those with verified identification and existing bank accounts. Although potential investors are warned about scammers and promoters of high-risk investment schemes, it is perfectly legal to invest in Bitcoin or altcoins.
While there are special laws and regulations that could consider users creating units of Bitcoin and exchanging them for fiat to be money transmitters – to-date these laws have rarely, if ever, been enforced to stop Bitcoin mining.
It is perfectly legal for businesses both small and large to accept Bitcoin as payment for goods or services. Obviously, this refers to “legal” goods and services for which ordinary currency is also accepted. Accepting Bitcoin is the same as accepting cash, gold, or gift cards. Businesses are required to pay taxes on income received through the acceptance of Bitcoin just as with any other method of payment.
Paying Taxes on Bitcoin
The IRS Notice 2014-21 states that the U.S. government will treat cryptocurrencies as property instead of as currency. The result is that everyone from consumers and merchants to bitcoin miners and service providers fall under the larger umbrella of bitcoin “investors” in some way or another, and will have to deal with complicated and sometimes daunting reporting requirements.
For most investors, particularly those investing long-term, this is a favorable ruling; accrued long-term gains and losses will be taxed at each investor’s applicable capital gains rate (15% for max) as opposed to at ordinary income rates (25% for max). Traders with short-term capital gains could still be taxed at their ordinary income-based rates, so it’s a good idea to consult with a tax professional and pay your taxes. Large short-term trading losses may have to be carried forward for years which places investors who have suffered trading losses in a disadvantageous position compared to what they would have been able to write off with “foreign currency” losses against ordinary income.
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