Bitcoin Laws, Tax and Regulation
One of the biggest perks of Bitcoin, for some, is that it is largely unregulated and isn’t connected to a single country or entity. Now that Bitcoin has gone mainstream, more countries and regions are examining their policy regarding the use of cryptocurrencies.
If you’ve ever wondered why Bitcoin isn’t regulated, what that means for its users and the world market, and what laws and regulations would do to the cryptocurrency, this page answers the questions that keep you tossing and turning at night.
Brief History of Bitcoin
Before we begin, it would be helpful for you to know how Bitcoin began and some major events that have occurred between then and now.
2008 – Bitcoin Introduced
Satoshi Nakamoto, an anonymous group or person whose identity is still unknown, posted a paper to a cryptography discussion site. The paper, titled Bitcoin: A Peer to Peer Electronic Cash System, details a new type of digital currency that allows payments and transactions between parties without going through a central authority like a banking institution.
2009 – Bitcoin Goes Public
Bitcoin mining began for the first time after the software became available to the public. There wasn’t a huge amount of interest to start with, but that would change in the future.
2010 – First Bitcoin Sale
Bitcoin had only been mined up to this point, meaning it had no monetary value assigned to it. That changed in 2010 when someone traded 10,000 Bitcoins for 2 pizzas (roughly $20). From that point on, Bitcoin had a monetary value.
2011 – Altcoins Emerge
Altcoins, or alternative cryptocurrencies, began to hit the scene hoping to improve upon Bitcoin’s model and eventually dethrone it. As we know, there are a number of really popular altcoins in circulation today, but they have yet to reach Bitcoin-level popularity.
2013 – Value Plummet
In 2013, Bitcoin reached a value of $1,000 per coin for the first time. But soon after it reached that all-time high, it began to decline and finally settled at $300. It didn’t return to the $1,000 level until 2015.
2014 – Mt. Gox
In January 2014, Mt. Gox, at the time the largest Bitcoin exchange in the world, went offline, and almost 1 million Bitcoins vanished. The owners of those Bitcoins have suffered a permanent loss, and there are still investigations being done to find out exactly what happened.
2017 – Bitcoin Reaches $10,000
Bitcoin’s popularity seems to be unrelenting, and in 2017, that popularity led to the value of Bitcoin rising to $10,000 per coin. It has since dropped below that level a few times, but it’s always made its way back. Who knows what will happen to its value in the years to come?
If you’d like a more detailed history of the world’s first popular cryptocurrency, be sure to check out the following page.
The Legal Status of Bitcoin
Digital currencies are a new concept to most people, and because of Bitcoin’s extreme surge in popularity, the demand for information is greater than ever.
One of the biggest concerns among potential Bitcoin buyers is the legality of digital currency and if they are walking into a situation where they are in danger of facing legal repercussions.
Let’s start by talking about the precedent that Bitcoin and cryptocurrency have set. Bitcoin was the first successful decentralized digital currency to hit the market. It is not directly connected to any government and isn’t controlled by a central banking authority. It’s basically the monetary equivalent of international waters.
Because of that, there are no global laws pertaining to Bitcoin. The legal status of Bitcoin is decided by individual governments, whether regional (like the European Union) or by country.
If you are planning on buying or using Bitcoin, you should check your local laws first to see if you will be breaking any laws. The same applies if you are a current user of Bitcoin, as it’s possible (although unlikely) that you could be acting illegally.
It’s also a good idea to make a point of regularly refreshing yourself on your country’s or region’s laws. They could well change significantly in the coming months and years.
It’s important to remember that Bitcoin will possibly NEVER be regarded as a genuine “legal tender” because the parameters for legal tender are typically that the currency needs to be printed, regulated, and controlled by that country’s government.
More often than not, you’ll find laws that ban or restrict Bitcoin, but not as many that specifically legalize it.
Here’s a list of regions where the use of Bitcoin has been made illegal, or at least restricted.
- South Korea
*Illegal as a payment tool
Here is a list of regions where Bitcoin is either broadly accepted or made explicitly legal.
- United States
- South Africa
- Costa Rica
- Trinidad and Tobago
- Saudi Arabia
- Czech Republic
- United Kingdom
- New Zealand
*Legal to trade and hold
Please note that these should NOT be considered comprehensive lists of Bitcoin’s legal status in every country. As I stated before, it’s your responsibility to check local laws before beginning to buy, sell, and use cryptocurrency.
Why Regulate Bitcoin?
Countries that are looking to put regulations on Bitcoin and other cryptocurrencies are doing it for a number of different reasons. Many don’t have faith in the cryptocurrency, as it isn’t tangible or backed up by a resource of value.
Some regions want to have as much control as possible over the methods of payment people in that region or country are using, and Bitcoin offers no control.
One of the biggest reasons for regulation, though, is crime. Whether it’s crime against Bitcoin users in the form of hacks and scams, or it’s crime against the state or government, it’s pretty widely agreed upon that crime is a motivator behind the push for the regulation of Bitcoin.
Scams and Hacks
Bitcoin’s decentralized and unregulated nature makes it a huge target for hackers and scammers.
Governments have no ability to guard users against the chance of having their Bitcoin stolen and have no ability to rectify the situation or hunt down the culprits to make sure they can’t do the same thing to anyone else.
Apart from scams and hacks, there is a big concern about criminal activity taking place using Bitcoin, like buying and selling drugs, terrorist activity, and money laundering, to name a few.
Though scams and hacks and other criminal activities may be seen as a threat by most governments, there are a lot of steps that you can take to keep your Bitcoin and cryptocurrency safe. It’s important to treat your Bitcoin investment the same way you’d treat any other type of monetary asset that you have.
Take your Bitcoin and the potential threat seriously and arm yourself with knowledge and available security measures.
Some Current Laws and Regulations
The major Bitcoin regions have different approaches to creating laws and regulating Bitcoin, but they are all in agreement that criminal activity is not to be tolerated. Below are 4 different countries or regions’ legal reactions to Bitcoin, but things are changing quickly in this relatively new financial sphere.
Keep yourself up to date with our Bitcoin and cryptocurrency update posts that will be hitting the site very soon in our blog.
China’s involvement in Bitcoin mining has been huge, at one point holding the title of the world’s largest community of Bitcoin miners.
The first thing they banned were ICOs (Initial Coin Offerings), which are basically campaigns to fundraise for a new cryptocurrency. Next came bank account freezes for anyone that had their account connected to an exchange. Miners had to shut their operations down, and internet access to anything related to cryptocurrency tracing was banned.
China is currently in a period of financial conservation, hoping to snuff out corruption and major capital outflow. Their harsh stance on Bitcoin and cryptocurrency isn’t isolated, and there are lots of other financial sectors in the country looking at increased regulations.
As an entity, the European Union has not made a clear decision about the legality of Bitcoin. They are in the process of creating plans to remove the anonymity and create some regulations for cryptocurrency trading. They are hoping to stomp out any money launderers and tax evaders who are using cryptocurrency for nefarious purposes.
The UK’s quickly-approaching exit from the European Union in March 2019 will not have an effect on these plans, as the Treasury of the UK is working to solve the legal problem of cryptocurrencies as well.
They are hoping to reach an agreement with cryptocurrency trading entities to report any suspicious transactions made on their platform. Though the EU seems to be flip-flopping with their intentions with cryptocurrency, it is clear that the main problem lawmakers have is with the potential for its use with criminal activity.
No legislator wants to be responsible for making things easier for criminal activity, and it will probably take a lot of careful planning and research before the EU reaches a point where they are able to make a clear decision about cryptocurrency.
The United States is pretty positive toward Bitcoin but is actively working to prevent illegal transactions being made. There are a number of major national businesses that accept Bitcoin as a payment, which has increased its legitimacy.
Bitcoin is seen as property for IRS tax purposes and is subject to capital gains tax. You are expected to claim Bitcoin that you possess, have made transactions with, or have sold on your taxes, and not doing so could lead to an IRS audit.
The IRS has requested that Coinbase share transaction information to increase the ability they have to accurately follow up if an audit is necessary, and it is within the realm of possibility that other major exchanges could follow.
So, the US exists in a positive grey area with Bitcoin and cryptocurrency. Nothing is really being done either way, but there are promises for decisions being made “soon.”
Canada has deemed Bitcoin a commodity, which means that they have basically the same legal status as bartering. Therefore, any income generated by selling, investing, or trading Bitcoin is considered business income.
Its legalization doesn’t make it a legal tender, as the Canadian government only officially recognizes the Canadian Dollar. Their specific definition of legal tender is defined as: “bank notes issued by the Bank of Canada under the Bank of Canada Act.” And because Bitcoin is neither a bank note nor issued by the Bank of Canada, it isn’t a recognized legal tender.
Stephen Poloz, the head of the Central Bank of Canada, has said the following.
The regulations and laws going forward are being done with caution, and representatives from each Canadian province believe Bitcoin to be a high risk of fraud.
In some places, Bitcoin and other cryptocurrencies are recognized by tax authorities, meaning you should claim them on your taxes under the appropriate category. But this is a tax after the fact. There are transaction fees built into most Bitcoin exchanges and other buying and selling entities, but they aren’t necessarily a tax.
Taxes are defined as a contribution to state or federal revenue. In order to do that, your local state and federal governments would have a hand in the operation, which is not appealing to some Bitcoin users.
If we’re talking about things like sales tax, the United States Internal Revenue Service (IRS) regards Bitcoin as a property. When you use your Bitcoin to buy physical goods online like furniture and flights, you are essentially selling that property and using the revenue generated from the sale to make a purchase.
Property sales must be reported on your taxes. Bitcoin is also subject to capital gains tax in the United States.
This means that if you buy an amount of Bitcoin, say $1,000, and that amount appreciates in value to $5,000, and you then use that $5,000 to make a purchase, that is considered a capital gain of $4,000. A 15% capital gains tax means that you are expected to pay $600 in taxes on that purchase alone.
Reporting these taxable things is upheld by the law, and if you think you owe any capital gains taxes or property taxes, you should claim them. There are a lot of resources and sites aimed at helping people figure out how to claim their Bitcoin on their taxes, so feel free to take advantage of that if you are unsure of what you should be claiming.
If you are a regular user of the Coinbase exchange, the IRS has asked for customer records in the past, and it is likely that they’ll do the same with some of the other major exchanges.
As for a global sales tax taken during the time of sales or purchases, it probably won’t happen any time soon. Bitcoin would have to be recognized as a global currency, and there would have to be tax laws in place for all other cryptocurrencies in circulation as well.
How Will Laws, Taxes and Regulations Affect Bitcoin?
With Bitcoin, it is difficult to predict any type of pattern with its value, as it is an incredibly volatile currency. But there are some hypotheses that can be made about its value and major events that occurred at the same time. We can’t say for sure that these events are what caused the value drops, but it is our opinion that they had an influence, at the very least.
Effect – A 71% drop in value, from $233 to $67, occurred overnight, and it took 7 months for it to reach $233 again.
Possible Cause – Bitcoin’s first mainstream appearance caused a significant buzz, which drove the price up to $233 too quickly. The drop in price was the market correcting itself in order to keep Bitcoin as stable as possible.
Effect – Bitcoin value dropped 49%, from $867 to $439, and didn’t recover until 2016.
Possible Cause – Mt. Gox, the largest Bitcoin exchange at the time, was hacked in January. It left almost 1 million people without their Bitcoins, and the exchange shut down all withdrawals. This incident proved that Bitcoin isn’t infallible, and many people rushed into the decision to sell.
Effect – Value came to just under $3,000 in June but soon began to fall, dropping to $1,860 by July.
Possible Cause – Bitcoin’s developers were at a stalemate, with none of them able to agree on a way to update Bitcoin to help it grow faster. They decided to “fork” the currency, which led to the implementation of a separate version of blockchain. This caused panic, and the market is reflective of the worries of Bitcoin owners.
Effect – Bitcoin had reached almost $5,000 at the beginning of September but fell to around $1,800 by September 15.
Possible Cause – China made the decision to ban ICOs, and there were a lot of rumors that they would soon be banning the trading, buying, and selling of cryptocurrency. China was the largest source of Bitcoin miners, and people sold their Bitcoin out of fear that it would be banned and that their investment would be rendered useless and worthless.
You can draw your own conclusions based on the data. There is no solid proof that these events have caused major Bitcoin value drops, but those who think that they’re linked might not be wrong.
As countries are still making decisions on the legality of Bitcoin, it’s possible that we will see the market experience similar drops that could take anywhere from a few months to a few years to recuperate from.
The Current Value of Bitcoin is
Bitcoin Laws, Taxes and Regulation in the Future
The future of Bitcoin is steeped in speculation. Is it the currency of the future, or a scam? The only thing we know for sure is that we don’t know anything. There are no discernable patterns or clear visions of Bitcoin’s future, which makes it an inherent risk to buy and invest in.
Nobel Prize-winning economist Joseph Stiglitz does not believe in Bitcoin, thinks that it doesn’t serve a useful purpose, and believes that regulating it would cause it to disappear – which is something he’s all for.
He said the following in an interview with Bloomberg.
This is a thought shared by many Bitcoin skeptics that believe that Bitcoin isn’t a step toward the future of currency but a way for criminals to get away with crimes.
Many governmental bodies and financial representatives believe that legalizing and regulating cryptocurrencies is a gateway to trouble. The potential of opening the door to money laundering, among other criminal activities, is a real concern that needs to be solved before any concrete steps toward legalization can be made.
Andreas Antonopoulos, Bitcoin and blockchain expert, said this in a tweet.
Many Bitcoin advocates believe that regulations are a waste of time and will never actually work to change anything about the nature of Bitcoin and what it is used for. Bitcoin and cryptocurrencies are a peer-to-peer network, the same setup that illegal torrent sites implement.
The government’s inability to shut down sites of that nature that have been around longer than Bitcoin is proof that regulations and laws won’t do much to impede its path.
Your thoughts on the matter really depend on your perspective and what you believe is the real priority in the scramble for governments to figure out how Bitcoin and other cryptocurrencies fit into their system.
Buy and trade with discretion and keep one eye on the news at all times. Be sure to check your local laws a few times a month to make sure you are still operating within the bounds of the law.