Legal Implications Of Owning Cryptocurrency: A Beginner’s Guide

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Cryptocurrency is still a hot topic in the financial sector as countries seek ways to develop governance. Some crypto-friendly countries, such as Japan, Canada, Australia, and Germany, are among the big economies that have integrated digital currency into the financial systems. Such developments have opened doors to more projects and innovations as businesses look to introduce products and cross-border services. 

Investors can now buy items abroad and pay through cryptocurrency. The underlying technology ensures that the transactions are tamperproof and block government manipulation. However, the risk of investing and owning cryptocurrency remains a considerable challenge. Hence, learning how to protect crypto assets is essential to avoid losses resulting from government pronouncements or cybercrime. 

In this article, you’ll learn the legal implications of owning cryptocurrency. 

What Is Cryptocurrency? 

Blockchain technology is the underlying distributed ledger that manages operations from a decentralized network of computers. Cryptocurrency is unregulated digital money that leverages the internet for its transmission. It relies on cryptography for the secured verification process and the creation of generic digital currency. Such structures provide insulation for cryptocurrency and limit government interference or manipulation. 

How Cryptocurrency Works

The digital currency market concept doesn’t have a central bank or government to control supply and demand. Instead, Blockchain technology runs the operations. This helps to speed up the transactions upon confirmation within the network. 

The exchange of cryptocurrency is virtual since it only exists on the internet. Besides the characteristics, the value of cryptocurrency depends on the market sentiments of the users and investors. It also influences ownership because of the decentralized nature of the digital currency. No one can design notes or coins as with fiat money. But speculation remains the primary driving force of the market capitalization in digital currencies.

Cryptocurrency is formed by completing complex mathematical problems known as mining. It’s a capital-intensive venture that needs powerful computers to generate income. For storage, people use encrypted digital wallets that hold cryptocurrency investments. You can only buy crypto from brokers in the market. Proof-of-work (PoW) and proof-of-stake (PoS) help generate cryptocurrency through mining and distributing stakes. 

Is Cryptocurrency Legal?

The growth of the cryptocurrency market has gotten the attention of governments and financial sector regulatory bodies. The legality of digital currency is an ongoing debate in many economic forums. However, countries like the United States can use multi-agencies to regulate cryptocurrency investment. Such moves show that the digital currency market is gaining acceptance in states.

China banned the digital currency concept and forced investors to shut down operations in its territory. The pronouncement considers cryptocurrency an asset, not a legal tender in India. This mixed reaction of technology gives way to law considerations that affect cryptocurrency ownership. 

Here are some of the legal implications of having cryptocurrency in your portfolio.

1. Cryptocurrency Transmission And Money Laundering 

Financial commentators suggest that cryptocurrency is a haven for organized financial crimes. The primary concern is that the transmission of digital currencies remains anonymous. Dark market sites capitalize on this feature of cryptocurrency to fulfill orders while concealing the identity of users. Financial fraud and money laundering are the legal concerns that surround cryptocurrency ownership.

The conversion of cryptocurrency to legal tender is where regulations have made headway. However, the cryptocurrency market is still evolving, and this will challenge the existing financial sector regulations. Exchanges must use the anti-money laundering rules to disburse funds or transaction clearance.

2. Contractual Concerns

The cryptocurrency market offers smart contracts that enable businesses to close deals based on a promise to deliver goods and services. This defies the traditional contract law due to the underlying decentralized nature of cryptocurrency. Referencing and amending smart contracts are impossible and have an unclear legal framework. Usually, the transaction is complete once you execute a specified smart contract requirement.

3. Taxation On Cryptocurrency

Tax considerations of cryptocurrency depend on how the government views the digital currency. This may affect tax remittance and filing of annual returns with the revenue authorities. Crypto-friendly countries refer to existing taxation laws to derive controls for cryptocurrency.

It’s crucial to learn whether cryptocurrency is a property or a medium of exchange in your state before investing in the market. For instance, cryptocurrency is a property in America with no Internal Revenue Code to reference when remitting taxes. But any transactions involving cryptocurrency should be reported. 

Cryptocurrency taxation can use the following classifications:

  • Income Tax: Whether you make a profit or loss in cryptocurrency transactions, you must declare it when filing income taxes. The consideration may vary by the percentage allowed by the conventional tax laws in your country. 
  • Changeable Gains: Since cryptocurrency is viewed as an asset in crypto-friendly countries, investors might have capital gains tax obligations. It’s crucial to refer to tax classifications of assets in your country for guidance.
  • Corporation Tax: Companies integrating cryptocurrency into their financial systems must know the corporation tax regulations. The profit and losses recorded for all virtual currency transactions are subject to taxes. 

Holding the digital currency has underlying tax considerations. If the value changes due to the hyper-volatile market, the gains or losses incurred might need declaration when filing returns. Further, cryptocurrency ownership has many forms, such as gifts from friends and relatives.

4. Jurisdictional Concerns

The actual location of blockchain technology that runs cryptocurrency operations is unknown. This poses a jurisdictional concern since no legal framework guides investing in the market. Moreover, the decentralized distributed computer network has no physical address to handle discrepancies. Such features of the market make cryptocurrency ownership a risky venture.

5. Registration And Licensing 

Cryptocurrency is fast penetrating various sectors of the economy by being part of the payment systems. Those in crypto-friendly regions can apply for digital currency licenses to integrate cryptocurrency into the financial systems. This may force business managers to obtain registration from monetary authorities. But the challenge of deriving laws is still a key factor. 

Conclusion

Investing in cryptocurrency is a huge undertaking that needs an analytical review of the hyper-volatile market. The prices fluctuate frequently, which may affect your crypto holdings’ value. Besides, countries that accept digital currencies consistently seek ways to control the market. Any governance pronouncements can significantly impact your portfolio performance. 

If your country allows cryptocurrency transactions, refer to the law requirements to safeguard your investments. Consult the cryptocurrency community for insights on the legal implications of owning digital assets.