Legal Risks for Investors in Cryptocurrency

Key points

  • Cryptocurrency as a Property
  • Cryptocurrency Being Decentralized
  • Licensing and Registration
  • Financial Crime

An increase in the interest in digital currencies has raised the need of having a clear picture regarding the legal implications of this new currency and technology. Around the world, all governments, financial institutions, and regulatory agencies are working very hard to understand the nature of digital currencies. Digital currencies are completely different from fiat currency or conventional electronic money. 

The legal standing of cryptocurrency is still in the dark because they are comparatively new in comparison to traditional currency. Legal implications associated with investing in cryptocurrencies are slowly emerging and a few are discussed below:

Cryptocurrency as a Property

The biggest legal consideration with cryptocurrency holdings is how they are viewed by central authorities. In the U.SCryptocurrency holdings are identified as property by the IRS. This means that cryptocurrency investors are obligated to capital gain tax laws when declaring their cryptocurrency expenses and profits in annual tax returns.      

There still are many aspects that create confusion in the minds of U.S. taxpayers. For investors who have traded in cryptocurrency on foreign exchanges, it still is not clear whether they have to face additional reporting measures during tax time. CNBC, in its report, has stated that “Any investor with $10,000 investment in foreign exchanges will have to fill the Report of Foreign Bank and Financial Accounts (FBAR), with the treasury department. Another law, Foreign Account Tax Compliance Act, or FATCA, asks its citizens to mention all their foreign accounts on Form 8938 when filing tax returns with the IRS”.

Cryptocurrency Being Decentralized

The most benefitting feature of cryptocurrency is also a possible risk factor for individual investors. Being decentralized means that there is no central authority to regulate it. 

Where this frees investors from being obligated to these institutions, it also could lead to various legal complications. In a situation, where there is a complication with ownership or transaction of cryptocurrency, an investor could be left in heave, without the backing of central authority.         

During transactions, without any trusted financial institution to create and settle deposit and debt claims, it is very likely that legal confusion between the two parties will occur. In such a situation, the path of legal resources can be difficult to take because of the decentralized state of cryptocurrency.    

Licensing and Registration

For organizations dealing in the crypto market, they don’t need to register and obtain a license. But it may be obligatory for them to submit to special considerations based on their jurisdiction. It is the responsibility of owners to ensure that proper legal procedures are followed to carry operations at the local and state level. They should always distance themselves from any criminal-related activities.

Financial Crime

Investors who became a victim of financial crimes such as fraud, will have no legal options as traditional fraud victims may face. Even in instances, where cryptocurrency exchanges are hacked and cryptocurrency holdings are stolen, there is no standard practice of recovering them. Hence, investors are finding ways to create secure means in which they can hold their coins and tokens. Even cryptocurrency exchanges are working hard to improve their security measures and protect them from any risks.    

Disclaimer: The article is just to provide information and shouldn’t be considered as any financial advice. It is advisable to conduct thorough research before investing in any cryptocurrency. 

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