Bitcoin Regulation: Is Bitcoin Legal in the US?
Is it legal to buy Bitcoin in the USA? To be sure, cryptocurrency is indeed legal in the United States, and payments made using BTC are subject to the same taxes and reporting requirements as any other currency.
It is understandable to have questions about the legality of using Bitcoin. The new currency introduced a new paradigm from the traditional regulations that govern fiat currency. Nevertheless, it operates in a seemingly gray area when it comes to regulation. However, many of these concerns boil down to misunderstandings, or a lack of discrete rules that govern cryptocurrency, rather than intended violations of the law.
When it comes to taxation, the Federal government has deemed virtual currencies as property, similar to stocks and bonds, for federal tax purposes. Therefore, buyers and/or sellers must treat it accordingly.
Bitcoin Legal Issues
When Bitcoin was introduced, it created a completely new and unique paradigm. The world’s first digital, decentralized currency that isn’t controlled by anyone at all. Moreover, the very concept of digital currency implies that anyone with enough computing power can create coins by simply being an active part of the community.
Bitcoin Regulation in United States
As Bitcoin becomes more and more mainstream, law enforcement agencies, tax authorities and legal regulators all over the world are trying to wrap their heads around the concept of cryptocurrency, and how exactly it ought to fit into existing regulations and legal frameworks.
Cryptocurrency exists in a deregulated marketplace; there is no centralized issuing authority and no way to trace it back to the company or individual who created the Bitcoin. There is no personal information required to open a crypto account, or to make a payment from an account as is the case with a bank account. There is no oversight designed to ensure the information on the ledger is true and correct.
Bitcoin payments in the U.S. are subject to the same anti-money laundering regulations that apply to transactions in traditional currencies, and to payments by banks and other financial institutions. However, the anonymity of these transactions makes it far easier to flout the rules. There are concerns, voiced by former Federal Reserve Chairman Ben Bernanke, that terrorists may use cryptocurrency because of its anonymity. Drug traffickers are known to use it, with the best-known example being the Silk Road market. This was a section of the so-called dark Web where users could buy illicit drugs; all transactions on Silk Road were done using BTC. It was eventually shut down by the FBI in October 2013, and its founder, Ross William Ulbricht, is serving multiple life sentences. However, numerous other dark Web crypto-based markets have reportedly taken its place.
The cryptocurrency history has also been filled with instances of exchanges suddenly shutting down and running away with people’s funds. The most famous of such cases is the closure of the notorious exchange Mt.Gox. At the beginning of 2014, formerly the most prominent cryptocurrency exchange in existence, filed for bankruptcy due to technological problems and the apparent theft or loss of 744,000 of its users Bitcoins. That number made up about six percent of 12.4 million BTC in circulation at the time.
Bitcoin’s ability to be used semi-anonymously is another cause for concern. Even though every single transaction is recorded in the Blockchain, it is very easy for users to stay almost completely anonymous, as those records only contain the public keys and the amount of funds transferred.
Is Buying Bitcoin Legal?
According to the U.S. Treasury Department’s Financial Crimes Enforcement Network, as of 2013, using Bitcoin to purchase well-natured goods and services is not illegal. Bitcoin was classified as a convertible decentralized virtual currency. They have also issued guidance, in which they stated that those who obtain units of virtual currency and use it to purchase goods are not considered money transmitters and are operating within the law. The cryptocurrency is accepted as a form of payment on several major and minor online marketplaces and from service providers, including Overstock, Shopify and OKCupid. Moreover, there are shops and restaurants all over the U.S. where you can pay with BTC.
According to the same guidance, investing in cryptocurrency is also legal. Many regulated US-based exchanges have to comply with the Anti-Money Laundering and Know Your Customer policies. Also, you can always buy BTC at one of the exchanges (check our TOP-10 Best Places to Buy Bitcoin). Because of that, those who wish to trade and invest in digital gold have to verify their ID and connect an existing bank account.
It’s legal for businesses, both big and small, to accept Bitcoin payments. Assuming, of course, that it’s a well-natured business that sells goods and services for regular currency and chooses to accept BTC as another legal way to pay. Any business accepting crypto payments is also required to pay taxes on income received through BTC.
Bitcoin has been recognized as a convertible virtual currency, which implies that accepting it as a form of payment is exactly the same as accepting cash, gold or gift cards.
Although, the U.S. Securities and Exchange Commission (SEC) has warned potential investors that both fraudsters and promoters of high-risk investment schemes may target cryptocurrency users.
When it comes to taxation, the IRS views virtual currencies as property for federal tax purposes, similar to stocks and bonds, and federal tax law dictates that purchasers and/or sellers must treat it as such.
Is Bitcoin Mining Legal in USA?
There are crypto miners in the U.S. who mine new coins and do it absolutely legally (but if it is profitable, then it’s a different story).
Virtual currencies are classified as digital commodities. Only capital gains should be reported. As commodity trading needs capital gains to be reported, the same with virtual currencies. As long as you keep them, there is no obligation. When exchanged, or spent, the gains should be reported.
The FinCEN guidance states that users creating units of Bitcoins and exchanging them for fiat currency can be considered money transmitters and might be subject to special laws and regulations that cover that type of activity.
Is Bitcoin Trading Legal?
- Securities and Exchange Commission (SEC)
At the federal level, the Securities and Exchange Commission’s focus has been on the use of blockchain assets as securities, such as whether or not certain Bitcoin investment funds should be sold to the public, and whether or not a certain offering is fraudulent.
However, the SEC’s report focused entirely on Initial Coin Offerings, and Bitcoin is way past that. So, any regulations the SEC is likely to impose, will most likely only concern newcomers to the market. Whether BTC can be treated as a security depends on the particular transaction, but the SEC has decided that any firm using Blockchain technology to trade securities would need to register as an exchange, Alternative Trading System (ATS) or a broker/dealer.
- Commodities Futures Trading Commission (CFTC)
The Commodities Futures Trading Commission (CFTC) has a bigger potential footprint in crypto regulation, given its designation of the cryptocurrency as a “commodity.” While it has yet to draw up comprehensive digital currency regulations, its recent efforts have focused on monitoring the nascent futures market. It has also filed charges in several crypto-related schemes, which underscores its intent to exercise jurisdiction over cryptocurrencies whenever it suspects there may be fraud.
CFTC seems to have taken a pro-Bitcoin stance, recently granting LedgerX the right to create a regulated Bitcoin futures market. In September 2017, CFTC filed its first-ever charges against Bitcoin fraudsters. In a move welcomed by genuine investors, Gelfman Blueprint was charged with fraud, misappropriation and issuing false account statements in connection with solicited investments in BTC.
- Uniform Law Commission
The Uniform Law Commission, a non-profit association that aims to bring clarity and cohesion to state legislation, has drafted the Uniform Regulation of Virtual Currency Business Act, which several states are contemplating introducing in upcoming legislative sessions. The Act aims to spell out which virtual currency activities are money transmission businesses, and what type of license they would require. Critics fear that it too closely resembles the New York BitLicense.
BitLicense is a set of regulations regarding BTC transactions put forward by the New York State Department of Financial Services (NYDFS) for Bitcoin companies operating in New York or serving NY residents.
The license can be obtained through a process of application, which costs $5,000. Companies looking to obtain the license will need to have a compliance officer responsible for overseeing the firm’s compliance with the regulations. Moreover, all other federal and state laws that apply to Bitcoin have to be obeyed. This includes compliance with Money Transmitter laws, Anti-Money Laundering and Know Your Customer policies. Such protections can get very expensive.
- Financial Crimes Enforcement Network (FinCEN)
According to FinCEN’s guidance on cryptocurrency, ‘virtual currency,’ as they call it, is defined as a ‘medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency.’ The guidance only addressed convertible virtual currency like Bitcoin, that can either act as a substitute for real currency or has an equivalent in existing currency.
‘Users’ of virtual currency are not considered an MSB (Money Serving Business) under FinCEN’s regulations. This means that if you obtained BTC to pay for goods or services, you are not subject to MSB registration, reporting and recordkeeping regulations.
- Internal Revenue Service (IRS)
According to IRS regulations, buying goods and services with cryptocurrency is exactly the same as selling an asset. If you spend your coins, it means that you’ve either made a profit or a loss, depending on BTC’s exchange rate when you bought it and when you sold it.
In order to comply with IRS regulations, it is recommended that you keep a record of all your Bitcoin-related transactions.
As only 0.04% of customers included crypto in their 2017 tax reports, the IRS has ramped up their hunt for Bitcoin tax evaders, having even formed a dedicated taskforce. However, while the IRS is closely monitoring cryptocurrency transactions in an attempt to get more tax dollars, there have been rumors about a possible future tax amnesty for Bitcoin users. Whether it will actually happen, and/or when, still remains to be seen.
- Federal Reserve
The U.S. Federal Reserve is very interested in digital currencies and the technology associated with them, having published thorough papers on both Bitcoin and Blockchain. The fact that a financial giant like the Federal Reserve invested man-hours into understanding the concept of Bitcoin speaks volumes about how influential the currency is becoming.
However, the organization has repeatedly issued warnings about the risks associated with digital currencies. Recently, the Federal Reserve stated that they are paying very ‘close attention’ to Blockchain, describing it as something that ‘could ameliorate or exacerbate traditional financial risks.’
- Financial Industry Regulatory Authority (FINRA)
FINRA is a self-regulatory organization for U.S. brokers that is quite active in terms of defining Bitcoin, completing guides and issuing warnings for its clients. In its report on Distributed Ledger Technology FINRA implied that the widespread use of Blockchain technology could impact the organization’s core business practices. Specifically, the way FINRA members self-regulate in the areas of Anti-Money Laundering and Know Your Customer policies, asset verification, business continuity, surveillance, payments and even record-keeping.
- Office of the Controller of the Currency (OCC)
The office of the U.S. Treasury proposed a possibility of moving forward with considering applications from FINtech companies to become Special Purpose National Banks (SPNBs). This initiative is set to provide companies that wish to become limited purpose digital banks with a unified federal regulatory regime. However, there are still some significant political and legal uncertainties surrounding this initiative.
- Customer Financial Protection Bureau (CFPB)
The Bureau has issued a consumer warning about Bitcoin. The volatile exchange rates, possible lack of assistance from exchanges in case of lost funds and the threat of hacking and scams were cited among potential issues.
- National Futures Association (NFA)
NFA is an independent self-regulatory organization for the U.S. futures market. Every participant in the futures market, including those trading in Bitcoin, is required to have NFA membership.
Bitcoin Regulation by State
Regulation of cryptocurrency varies across the country. There is a huge difference in attitude towards the cryptocurrency across individual U.S. states. How is Bitcoin legal in every state? The study sorts America’s 50 states as either “friendly”, “murky” or “hostile” to BTC and other altcoins based on the laws they have enacted.
“Friendly” states include Texas, which, according to the study, does not require cryptocurrency traders to have a “money transmitter” license.
“Hostile” states include Washington state, which includes digital currency in its legal definition of money, meaning a special permit may be required in the future.
Most states have yet to consider legislation on cryptocurrencies. However, for the states that have imposed legislation, here’s a rundown of the current regulations by state.
|Alabama (AL)||Murky||Regulated (you need to obtain a money transmitter license.)|
|Alaska (AK)||Murky||Legislation introduced (you need a license.)|
|Arizona (AZ)||Murky||Regulated/Regulated/Legislation introduced (it is illegal to create a blockchain-empowered firearms registry or to compel any Arizona resident to use one, while smart contracts are recognized as legal.)|
|Arkansas (AR)||No opinion|
|California (CA)||Murky||Regulated/Legislation introduced/Legislation defeated (Raffles for Bitcoin or altcoins have been illegal since 2016. Smart contracts and private ownership to personal information stored on a blockchain recognized legal in 2018)|
|Colorado (CO)||Friendly||Legislation introduced|
|Connecticut (CT)||Hostile||Regulated/Legislation introduced (requires a money transmitter license. Requires license holders that are entrusted to take care of altcoins for a person or business to hold altcoins of the same type and amount at all times.)|
|Delaware (DE)||Friendly||Regulated (offers statutory authority for state corporations to convert corporate records to a blockchain ledger.)|
|Florida (FL)||Friendly||Regulated/Legislation introduced (virtual currency laundering is prohibited)|
|Georgia (GA)||Hostile||Regulated/Legislation introduced (state regulators are creating rules for regulating altcoin businesses. Requires the state tax collector to accept altcoins for payment of taxes and license fees)|
|Hawaii (HI)||Hostile||Banned/Legislation introduced (In 2014 no company was licensed to transmit or handle altcoins in Hawaii and that “if companies are offering to transmit Bitcoins, they are doing so in violation of Hawaii’s money transmitter laws.” In 2018 the ban would be lifted and altcoins are defined as being under the auspice of the Money Transmitters Act and by establishing rules for altcoin money transmitters.)|
|Idaho (ID)||No opinion||Not regulated|
|Illinois (IL)||Friendly||Legislation introduced (any state tax can be payable in altcoins.)|
|Indiana (IN)||No opinion||Not regulated|
|Iowa (IA)||No opinion||Not regulated|
|Kansas (KS)||Friendly||Not regulated (Kansas’ official opinion is that no money transmitter license or other regulation beyond federal oversight is needed for altcoin businesses.)|
|Kentucky (KY)||No opinion||Not regulated|
|Louisiana (LA)||No opinion||Not regulated|
|Maine (ME)||Murky||Legislation defeated|
|Maryland (MD)||No opinion||Not regulated|
|Massachusetts (MA)||No opinion||Not regulated|
|Michigan (MI)||No opinion||Not regulated|
|Minnesota (MN)||No opinion||Not regulated|
|Mississippi (MS)||No opinion||Not regulated|
|Missouri (MO)||No opinion||Not regulated|
|Montana (MT)||Friendly||Not regulated, but government investment/intervention in altcoin business|
|Nebraska (NE)||Murky||Legislation introduced (altcoins are under the state’s Money Transmitter Act; smart contracts are legal; the taxing of blockchain technology by local governments is prohibited.)|
|Nevada (NV)||Friendly||Regulated (electronic signatures on a blockchain are legal, banned local governments from taxing a “smart contract” or blockchain technology, and other provisions.)|
|New Hampshire (NH)||Friendly||Regulated/Legislation defeated (exempted altcoin businesses from needing to register as a money transmitter.)|
|New Jersey (NJ)||Friendly||Regulated/Legislation introduced (allowed an executor, agent, or trustee to manage the electronic records of a principal or descendant.)|
|New Mexico (NM)||Hostile||Regulated (requires money transmitters to obtain a license.)|
|New York (NY)||Hostile||Regulated/Legislation introduced (BitLicense is a framework that requires a $5,000 license for altcoin businesses in the state.)|
|North Carolina (NC)||Murky||Regulated (altcoin businesses are included in the auspice of the state’s Money Transmitter Act; altcoin money transmitters have to obtain a license and secure insurance on altcoin transmission.)|
|North Dakota (ND)||Murky||Legislation defeated|
|Ohio (OH)||Murky||Not regulated (altcoins cannot be used for the purchase of alcohol.)|
|Oklahoma (OK)||Hostile||Regulated (altcoin transferees are not to be afforded money transfer protections while maintaining there is an “existing security interest” attached to altcoin transactions.)|
|Oregon (OR)||Murky||Regulated (requires altcoin businesses to register as money transmitters, subject to licensing.)|
|Pennsylvania (PA)||Murky||Regulated (defined altcoins as money.)|
|Rhode Island (RI)||No opinion||Not regulated|
|South Carolina (SC)||Murky||Regulated (requires money transmitters to be licensed.)|
|South Dakota (SD)||No opinion||Not regulated|
|Tennessee (TN)||Murky||Legislation introduced (altcoins are not money and therefore require no licensing.)|
|Texas (TX)||Friendly||Legislation defeated (altcoin is not money and therefore, not subject to regulation.)|
|Utah (UT)||Friendly||Regulated/Legislation defeated (taxes can be paid with altcoins.)|
|Vermont (VT)||Friendly||Regulated/Legislation introduced (allows blockchain data to be used in the state’s court system; altcoins are subject to state money transmitter rules.)|
|Virginia (VA)||Friendly||Regulated/Legislation introduced (allows fiduciaries to manage digital properties.)|
|Washington (WA)||Hostile||Regulated/Legislation introduced (altcoin businesses are subject to state money transmission laws.)|
|West Virginia (WV)||Hostile||Banned (recognizes altcoins as money but banned their use in the state due to its association with crime.)|
|Wisconsin (WI)||Murky||Not regulated (State money transmitter rules require altcoin companies to sign an agreement to not use altcoins to transmit fiat currency.)|
|Wyoming (WY)||Friendly||Legislation introduced (exempt altcoins from the state’s Money Transmitters Act; exempt altcoins from state property tax.)|
As you can see, Bitcoin regulation by State varies a lot. Cryptocurrency legality depends on the state you are in and what you’re doing with it. It is safe to use digital currency, but it is important to remain up-to-date on the latest regulations concerning the digital currency. As laws change across borders, governing bodies and as the platform gains popularity, questions about Bitcoin’s legality will continue to be raised.