Hello. In this post we will tell you about the legal risks to cryptocurrency investors.

Investors assume certain legal risks when they buy and sell cryptocurrencies. 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.

Here are 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 as currencies proper. 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.

This aspect of the cryptocurrency space adds layers of confusion and complexity for U.S. taxpayers. 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 requires certain U.S. taxpayers to describe their overseas accounts on Form 8938, when they file their taxes with the IRS.

This suggests that digital currency investors should take special precautions to follow the advice of tax professionals when it comes to reporting cryptocurrency profits and losses. Because the rules are constantly changing, what may have been legally permissible last year or even months ago may now be cause for legal concern.

Decentralized Status

Bitcoin (BTC) has paved the way for other cryptocurrencies in that it is decentralized, meaning that it has no physical presence and is not backed by a central authority. The value of digital currencies is dependent entirely upon the value that other owners and investors ascribe to them; this is true across all currencies, digital or fiat. Without a central authority backing the value of a digital currency, investors may be left in the lurch should complications with transactions or ownership arise.

Another potential risk associated with cryptocurrencies as a result of their decentralized status has to do with the particulars of transactions. In most other transactions, currency with a physical presence changes hands. In the case of electronic money, a trusted financial institution is involved in creating and settling deposits and debt claims. Neither of these concepts applies to cryptocurrency transactions. Because of the decentralized state of these currencies, the path of legal recourse in these situations can be difficult to assess.

Business Registrations and Licensing

A growing number of businesses are taking advantage of digital currencies as a form of payment. As in other financial areas, businesses may be required to register and obtain licensure for particular jurisdictions and activities. Owing to the complex and evolving legal status of digital currencies, this area is significantly less clear for businesses operating in the crypto market. Companies which only accept cryptocurrencies, for example, may not need to register or obtain licenses at all. On the other hand, they may be required to submit to special considerations depending upon their jurisdiction. The onus of responsibility falls on business owners and managers to insure that they are following proper legal procedure for their operations at both the local and state levels.

Fraud and Money Laundering

There is a widespread belief that cryptocurrencies provide criminal organizations with a new means of committing fraud, money laundering, and a host of other financial crimes. This may not directly impact most cryptocurrency investors who do not intend to use this new technology to commit such crimes. However, investors who find themselves in the unfortunate position of being a victim of financial crime do not likely have the same legal options as traditional victims of fraud. There is frequently no standard practice for recovering the missing funds. Digital currency investors thus take on a certain amount of risk by purchasing and holding cryptocurrency assets.