By NATHAN REIFF
Along with the explosion of interest in digital currency and all of its implications for both new and traditional businesses, there is a growing need for clarity regarding the legal implications of these new technologies and currencies. As governments around the world, regulatory agencies, central banks, and other financial institutions are working to understand the nature and meaning of digital currencies, individual investors can make a great deal of money investing in this new space. On the other hand, investors assume certain legal risks when they buy and sell cryptocurrencies.
While digital currency might be easy to confuse for conventional electronic money, it is not the same; similarly, it is unlike conventional cash currencies because it cannot be physically owned and transferred between parties. Much of the murkiness of the legal standing of digital currency is due to the fact that the space has only recently become popular as compared with more traditional currency and payment systems. Below, we’ll explore some of the emerging legal implications associated with investing in cryptocurrencies.
Cryptocurrencies as Property
One of the most critical legal considerations for any cryptocurrency investor has to do with the way that central authorities view cryptocurrency holdings. In the U.S., the IRS has defined cryptocurrencies as property rather than currencies. This means that individual investors are beholden to capital gains tax laws when it comes to reporting their cryptocurrency expenses and profits on their annual tax returns, regardless of where they purchased digital coins.https://373866709fe84d5df3903922f7b21d7d.safeframe.googlesyndication.com/safeframe/1-0-38/html/container.html
This aspect of the cryptocurrency space adds layers of confusion and complexity for U.S. taxpayers, but the difficulty does not end there. Indeed, it remains unclear whether digital currency investors who have purchased their holdings on foreign exchanges must face additional reporting measures come tax time. According to a report by CNBC, “anyone with more than $10,000 abroad usually needs to fill out the Report of Foreign Bank and Financial Accounts (FBAR)… with the Treasury Department each year. Another law—the Foreign Account Tax Compliance Act, or FATCA—requires certain U.S. taxpayers to describe their overseas accounts on Form 8938, when they file their taxes with the IRS.”1