When Bitcoin hit the market in 2009, no one knew if cryptocurrency would revolutionize the global economy or fade away within a few years. Now, more than 10 years later, cryptocurrency remains popular among dedicated traders and investors but hasn’t quite spread among the masses. As of January 2020, more than 2,000 cryptocurrencies existed, and according to the Bitcoin Market Journal, about five percent of Americans held Bitcoin in 2019. But how has the U.S. government responded to this rise in cryptocurrency use?
What is cryptocurrency? Just as you use coins, cash, and credit to make purchases, you can use cryptocurrency to buy and sell commodities. Cryptocurrency has no physical form, material backing, or government insurance. However, cryptocurrency stores value because of its scarcity, divisibility, utility, and transferability.
The U.S. federal government remains reluctant to embrace cryptocurrency. However, individual governmental bodies do have rules and regulations regarding cryptocurrency. Primarily, these regulations serve to prevent illegal activity and ensure proper taxation.
Internal Revenue Service (IRS)
According to the IRS, cryptocurrency operates like “real” currency but does not have legal tender status anywhere in the U.S.
The IRS says: “Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as “convertible” virtual currency…Bitcoin can be digitally traded between users and can be purchased for, or exchanged into, U.S. dollars, Euros, and other real or virtual currencies.”
Furthermore, the IRS requires crypto traders to report their virtual currency transactions on their tax returns.
Financial Crimes Enforcement Network (FinCEN)
In 2019, FinCEN published guidelines that explain how the Bank Secrecy Act (BSA) applies to cryptocurrencies. This document covers all the relevant regulations passed since 2011.
Securities Exchange Commission (SEC)
In April of 2019, the SEC released its Statement on “Framework for ‘Investment Contract’ Analysis of Digital Assets.” The guide discusses how U.S. federal security laws apply to cryptocurrencies, beginning with a description of the “Howey analysis.” This test refers to the U.S. Supreme Court case that found: “an ‘investment contract’ exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”
Cryptocurrency State Laws
Within the U.S., individual states have come up with policies regarding the same. Some states have policies that encourage trading in crypto, while others have adopted a more restrictive approach. Arizona has chosen to encourage investment in this sector by pioneering the nation’s first “regulatory sandbox.” The state allows early investors to develop and test products in this field with as many as 10,000 customers for up to two years before applying for licensing.
What U.S. Crypto-Traders Need to Know
Before launching into cryptocurrency mining or investment, you should familiarize yourself with the federal agency guidelines described above and your home state’s policies regarding investment and trading. Here are a few of these guidelines to start you off, but bear in mind this list is not comprehensive.
- Use of Blockchain Technology– The only legislation the central government has in place regarding the use of blockchain technology for transactions is the 2000 Electronic Signatures in Global and National Commerce Act. This provision makes an electronic signature as admissible for authentication of some business contracts as a physical signature on a paper contract. In addition to this, different states have enacted legislation regarding blockchain tech.
New Hampshire, for instance, no longer requires parties transacting using virtual currencies to obtain money transmitter licensing. Wyoming made the same move two years ago.
- Tax Reporting– Individuals trading in crypto have to declare any losses or gains made in such transactions when filing their tax returns. Any profits will be subject to cryptocurrency taxes in the form of a capital gains tax.
- The Bank Secrecy Act– Since cryptocurrency transactions are qualified as MSB, the Bank Secrecy Act (BSA) subjects them to anti-money laundering regulations.
- Bankruptcy– If you apply for bankruptcy, you will be required to make even your cryptocurrency known to the debtor to recover the debt in question.
- Estate Planning– Estate planning provides an avenue for the inheritance of cryptocurrency by your dependents in the unfortunate event of your death. It contains specifics on the contents of your digital wallet and how they will be accessed. Laws regarding estate planning differ from state to state.
Know Your Rights, and Know the Risks
Cryptocurrency has only existed since 2009, meaning government agencies across the globe are still figuring out how to recognize and regulate their use. To trade cryptocurrency responsibly, make sure you understand your rights and the associated risks of crypto trading before diving in.