Legality
Are cryptocurrencies legal?
Fiat currencies derive their authority as mediums of transaction from the government or monetary authorities. For example, each dollar bill is backstopped by the Federal Reserve.
But cryptocurrencies are not backed by any public or private entities. Therefore, it has been difficult to make a case for their legal status in different financial jurisdictions throughout the world. It doesn't help matters that cryptocurrencies have largely functioned outside most existing financial infrastructure. The legal status of cryptocurrencies has implications for their use in daily transactions and trading. In June 2019, the Financial Action Task Force (FATF) recommended that wire transfers of cryptocurrencies should be subject to the requirements of its Travel Rule, which requires AML compliance.
In June 2021, El Salvador became the only country in the world to allow Bitcoin as legal tender for monetary transactions. The Central African Republic followed suit in April 2022, becoming the second country to do so. In the rest of the world, cryptocurrency regulation varies by jurisdiction.
Japan's Payment Services Act defines Bitcoin as legal property. Cryptocurrency exchanges operating in the country are subject to collect information about the customer and details relating to the wire transfer. China has banned cryptocurrency exchanges and mining within its borders. India was reported to be formulating a framework for cryptocurrencies in December.
Cryptocurrencies are legal in the European Union. Derivatives and other products that use cryptocurrencies will need to qualify as 'financial instruments'. In June 2021, the European Commission released the Markets in Crypto-Assets (MiCA) regulation that sets safeguards for regulation and establishes rules for companies or vendors providing financial services using cryptocurrencies.
Within the United States, the biggest and most sophisticated financial market in the world, crypto derivatives such as Bitcoin futures are available on the Chicago Mercantile Exchange.
Although cryptocurrencies are considered a form of money, the Internal Revenue Service (IRS) treats them as a financial asset or property. And, as with most other investments, if you reap capital gains in selling or trading cryptocurrencies, the government wants a piece of the profits. On May 20, 2021, the U.S. Department of the Treasury announced a proposal that would require taxpayers to report any cryptocurrency transaction of and above $10,000 to the IRS. How exactly the IRS would tax proceeds — as capital gains or ordinary income — depends on how long the taxpayer held the cryptocurrency.
Are cryptocurrencies securities?
The SEC has said that Bitcoin is not a security. It has not officially commented on the status of other cryptocurrencies.
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