Bitcoin was a phenomenal invention. It allowed for secure, borderless payments to be sent instantly, around the world. In addition to this, it also has caught the eye of many investors, who see it as an alternative investment vehicle for their portfolios.
The challenge with Bitcoin is that it is not regulated by any central authority or bank. This means that there are a lot of legal and tax implications which you have to be aware of before using it in your business or personal life
With bitcoin being a relatively new currency, we’ve seen several legal challenges that have arisen around it. Let’s look at some of the legal implications surrounding the use of bitcoin.
Bitcoin is a decentralized currency and this means that there is no central authority. Regulations exist only to protect citizens.
Bitcoin is the most popular cryptocurrency in the world. Unfortunately, it’s also a tool for criminals, terrorists, and anarchists to fund their malicious activities.
The U.S. Treasury Department has kept a watchful eye on bitcoin since early 2013, when the value of one bitcoin soared from $13 to over $1,100. A few years later, more people are trading in cryptocurrencies than ever before.
Cryptocurrency is only part of a much larger conversation about digital currency that’s taking place around the world. The world is moving towards electronic payments for many reasons: convenience, speed, and security. But it’s also moving towards digital currency because of the lack of trust in traditional financial institutions.
There are a number of reasons why people don’t trust banks: the 2008 financial crisis, corruption, the LIBOR scandal, the foreclosure crisis, bail-ins, and high fees. But one of the biggest reasons is that banks are not transparent.
The 2008 financial crisis is a perfect example of this lack of transparency.
It’s not surprising that virtual currency is gaining popularity – which had led to the watchful eye of the U.S. Treasury Department on bitcoin since early 2013, when the value of one bitcoin soared from $13 to over $1,100.
Bitcoin is a virtual currency that can be used to pay for goods and services without any kind of central bank, country or regulatory body.
Though transactions made in the digital currency are recorded on a public ledger called the blockchain, bitcoins themselves have no physical presence and cannot be printed, unlike U.S. dollars.
The IRS considers Bitcoin transactions as property exchanges which may result in capital gains tax liability if they are not reported properly on your tax return.
The recent explosion of Bitcoin popularity has also led to a spike in tax questions. The IRS has weighed in on the subject, and it is clear that Bitcoin is not considered currency by the IRS.
Bitcoin has been treated as property for federal tax purposes since the IRS issued Notice 2014-21. The notice provides that virtual currency is treated as property for federal tax purposes.
So, the general tax principles applicable to property transactions, also apply to transactions using virtual currency.
So how does this affect you:
1. Bitcoin and other virtual currencies are not considered legal tender.
2. The purchase or sale of bitcoin is not a barter transaction.
3. The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
4. A payment made using virtual currency is subject to Form 1099 reporting just as any other payment made in property.
Buying, selling and trading of bitcoin is legal. However, it is important to take note of its legal and tax implications before doing so.
As a result, you should only invest what you can afford to lose.
If you want to learn more about the legal and tax implications of using Bitcoin, comment below. We’d love to talk with you about it!