Legal and Quasi-legal Issues to Know Before Using Bitcoin and Other Cryptocurrencies
With the significant surge in cryptocurrencies over the past few years, regulators and governments have been looking for ways to control their usage. As you know, cryptocurrencies were created to do away with the middlemen, such as banks and governments, in transactions. However, due to their inevitable tremendous growth, which has actually shaken the status quo, most governments, including the U.S. government, have expressed their interest in cryptocurrencies and claimed some control over them. For example, the newly proposed regulations have made it easier for the government to track bitcoin and other cryptocurrencies.
Therefore, to be on the safe side of the law when using or investing in cryptocurrencies, here are some legal issues you should be aware of:
Do you have to pay taxes on Bitcoin transactions?
The short answer is yes.
The treasury has acknowledged bitcoin as a capital asset. And if an asset appreciates when you sell, use or trade it, the capital gains obtained are taxable. On the other hand, if it depreciates when used, traded, or sold, you can deduct the losses to reduce your taxes on the capital gains.
The amount taxed depends on the amount of time it's held and the capital gain or loss accrued when using that cryptocurrency. Therefore, you will need to know the date, sale value, cost basis, and any other fees associated with that transaction for tax filing purposes when you make a transaction,.
Notwithstanding, not all transactions are taxable. The law only applies in the following areas:
- When selling cryptocurrencies for fiat, that is, from crypto to USD, GBP, or EUR.
- When trading one cryptocurrency for another, i.e., from Bitcoin to Dogecoin
- When using cryptocurrency to buy a product or service.
- When receiving cryptocurrency as compensation for validating a transaction. Mining is considered a legitimate business in the U.S.
Areas where cryptocurrencies aren't taxable include:
- When buying cryptocurrencies with fiat.
- When gifting cryptocurrency to someone. But if the value reaches the threshold for gift tax, then the government will tax it.
- When moving cryptocurrencies between wallets that you own.
- When donating cryptocurrency.
Cryptocurrency Decentralized Nature
After the infamous 2008 financial crisis, the first successful cryptocurrency, Bitcoin, was created to do away with the banks' and governments' interventions when dealing with money. Thus, all transactions made with bitcoin and most cryptocurrencies are peer to peer. Meaning, there is shared access to the digital currencies from one person to another without a central server. Thus, the banks, government, and other regulators cannot have their hands on the transaction made. Besides, for a transaction to be verified, it sent to all the nodes on the blockchain network. Therefore, no one can actually tell who made that transaction.
Cryptocurrency value is mainly derived from the forces of demand and supply (hence their high volatility and market liquidity).
Cryptocurrencies are digital money. And just like fiat money, they need a place where they can be stored, easily accessed, and used whenever needed, something like a bank account.
And this is where independent wallets come in. They let you send, receive and hold your cryptocurrencies safely for as long as you need.
That said, these wallets are usually managed by private companies, for example, Coinbase. They will protect and give you an easy time when using your cryptocurrencies, but they have no control over what goes on in your wallet. Therefore, when you experience losses due to bad trade or expose your private key, and someone takes your money, they will not take responsibility.
A huge debate has been going on in regards to the anonymity and decentralized nature of cryptocurrencies. Money can move from one person to another without any oversight or regulations. Thus, it supports many illegal operations like money laundering, drug trafficking, etc. For this reason, the newly proposed regulations will ensure that people transacting more than $3000 at a time will have to identify themselves; that is, if you are using a Coinbase wallet. Also, if you make transactions of more than $10,000, you will need to identify yourself.
What's more, most wallets today will ask you for all your personal information before they allow you to own a wallet or make any transaction. This comes as an ironic development judging by the premise behind the creation of cryptocurrencies.
More people today are embracing cryptocurrencies today, and their popularity is predicted to rise further with time. Due to this, governments are constantly looking for ways to provide a legal framework and regulatory authority over the digital currencies used today. If this feat is achieved, cryptocurrencies will have the potential of becoming a global currency of the world.
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