Bitcoin Legality In The Us: What You Need To Know

Bitcoin's legal status has been a topic of debate and discussion for years, with varying opinions and approaches from different regulatory bodies and governments worldwide. As of March 2024, Bitcoin was legal in the US, Japan, the UK, and most other developed countries. However, its status has fluctuated over time, and it is essential to check the current laws of the country where Bitcoin transactions are planned. In the US, the Internal Revenue Service (IRS) considers Bitcoin property and has issued guidelines for taxpayers. The United States Securities and Exchange Commission (SEC), the Financial Crimes Enforcement Network (FinCEN), and the Commodity Futures Trading Commission (CFTC) are among the agencies with differing views on Bitcoin regulation.

Bitcoin's legal status in the US

Bitcoins Legal Status in the US

The legal status of Bitcoin in the US is complex and fragmented, with no easy answer. While it has never been illegal to buy and hold Bitcoin at a federal level, the regulatory status of Bitcoin has varied over time, and different agencies have differing views.

Federal Law

Under federal law, Bitcoin is defined as a commodity by the Commodity Futures Trading Commission (CFTC). The Securities and Exchange Commission (SEC) has stated that Bitcoin is not a security, and the Internal Revenue Service (IRS) has classified it as property, subject to capital gains tax.

State Law

The situation regarding Bitcoin is further complicated by the fact that the US is made up of multiple states, each with its own laws. For example, in some states, Bitcoin trading is legal, while in others, it is questionable. Some states, such as Hawaii, New York, Delaware, Florida, and Kansas, have adopted specific regulations for cryptocurrencies, while the majority of states have not.

Buying and Selling Bitcoin

In many states, it is perfectly legal to buy Bitcoin. In 2013, the US Treasury Department's Financial Crimes Enforcement Network (FinCEN) guidelines stated that it is legal to invest in Bitcoin and use it as a form of payment, provided the seller is willing to accept it.

Operating a Bitcoin ATM

The legality of operating a Bitcoin ATM also varies by state. For example, New York requires licensing for virtual currency financial intermediaries through its BitLicense, while Texas only requires a license if an ATM is connected to a cryptocurrency exchange.

Promoting Bitcoin

Promoting Bitcoin can be illegal if it is construed as a pump-and-dump scheme, which the CFTC defines as "coordinated efforts to create phony demand...and then sell quickly to profit".

Mining Bitcoin

It is legal to mine Bitcoin in the US.

Trading with Bitcoin

The answer to whether it is legal to trade with Bitcoin is complex, as there is no unified law governing cryptocurrencies, and it often comes down to individual states to determine whether a money transmitter license is required.

Gambling with Bitcoin

The current legal framework in most states provides few clear guidelines on using Bitcoin for gambling in online casinos, and there is no federal law governing this activity.

In conclusion, the legal status of Bitcoin in the US is complex and varies depending on the specific activity and the state in which it is carried out. While it is generally legal to buy, sell, and hold Bitcoin, there are grey areas and areas of uncertainty, particularly around trading, gambling, and certain types of promotion.

Federal law vs state law

The legal status of Bitcoin in the United States is complex and constantly evolving. While the federal government has classified Bitcoin as a commodity, the legal status of activities associated with it varies across states due to the fragmented legal system in the US. This section will explore the differences between federal and state laws regarding Bitcoin and cryptocurrencies in the US.

Federal Law

Under federal law, Bitcoin is defined as a commodity by the Commodity Futures Trading Commission (CFTC). On the other hand, the Securities and Exchange Commission (SEC) has stated that Bitcoin is not a security. These federal agencies, along with others such as the Federal Trade Commission (FTC) and the Department of the Treasury, have shown significant engagement with cryptocurrencies but have done little formal rulemaking.

At the federal level, there has been a recent push for more clarity and regulation in the cryptocurrency space. For example, the Responsible Financial Innovation Act (RFIA) aims to provide regulatory clarity, establish a strong regulatory framework, and integrate digital assets into existing tax and banking laws. Additionally, the Digital Commodities Consumer Protection Act (DCCPA) authorizes the CFTC to regulate "digital commodity platforms" and "digital commodity" trading. These efforts reflect a recognition of the importance of cryptocurrencies in the US's future infrastructure and the need to maintain a leading role in the development of this technology.

State Law

In contrast to the federal government's approach, the legal status of Bitcoin at the state level is less clear and more varied. While some states have tried to promote the technology by passing favourable regulations, others have made it more difficult for blockchain companies to operate by imposing stringent requirements, such as money transmitter licenses.

For example, states like Wyoming and Utah have passed laws that exempt cryptocurrencies from state securities laws and money transmission statutes. Wyoming has even enacted legislation to create a new type of bank, known as a special purpose depository institution, specifically for crypto-focused businesses. On the other hand, states like Florida and the District of Columbia have amended their money transmitter regulations to include virtual currencies, requiring certain intermediaries to obtain state-issued licenses.

The lack of uniformity among state laws can be challenging for businesses operating in multiple states. However, it is worth noting that some states, like Texas, do not require a money transmitter license for the sale of Bitcoin or other digital currencies. Additionally, certain states, such as Arizona, have adopted "regulatory sandboxes" that provide a testing environment for new emerging technologies like blockchain and cryptocurrencies.

The varying state laws also impact the taxation of cryptocurrencies. For example, the Internal Revenue Service (IRS) has classified Bitcoin and other cryptocurrencies as property for tax purposes, resulting in specific tax implications for individuals and businesses.

In summary, while federal law provides some overarching guidelines, the legal status of Bitcoin in the US is largely determined by a patchwork of state laws that can differ significantly from one state to another. This fragmented legal system makes it challenging to provide a definitive answer regarding the legality of Bitcoin and creates a complex landscape for individuals and businesses operating in the cryptocurrency space.

Selling Bitcoin in the US

The US Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) are the two federal bodies most concerned with Bitcoin. The SEC has stated that Bitcoin is not a security, while the CFTC declared in 2015 that it is a commodity, like gold, and thus subject to its regulations.

At the state level, the situation is more fragmented. Some states, like Hawaii, previously banned all crypto operations but have since changed their laws to require anyone involved in Bitcoin-related operations to apply for a money transmitter license. Other states, like New York, Delaware, Florida, and Kansas, have also adopted regulations. However, the majority of states haven't introduced specific legislation for cryptocurrencies.

Wyoming has distinguished itself as a pro-crypto state, passing over a dozen laws to facilitate easier commerce for crypto businesses and broader acceptance of cryptocurrencies. California is also working towards regulatory clarity with its "Digital Asset Regulatory Bill," which aims to position the state as a potential hotspot for crypto businesses.

It's important to note that the regulatory landscape for cryptocurrencies in the US is constantly evolving. While there is no indication that Bitcoin will be banned, it's advisable to stay informed about the laws and regulations in your specific state when selling Bitcoin in the US.

Bitcoin and taxes

The US Internal Revenue Service (IRS) treats cryptocurrencies, including Bitcoin, as property, not currency, for tax purposes. This means that sales are subject to capital gains tax rules.

The IRS requires taxpayers to report all transactions involving digital assets, including cryptocurrencies and non-fungible tokens (NFTs). This means that if you buy, sell, exchange, transfer, or use cryptocurrencies to pay for goods and services, you must report it on your tax return.

The tax definition of a digital asset is any digital representation of value recorded on a cryptographically secured, distributed ledger (blockchain) or similar technology. This includes convertible virtual currencies like Bitcoin, which can be used to pay for goods and services or exchanged for other currencies.

The IRS provides forms and instructions for reporting digital asset transactions, such as Form 8949, Sales and Other Dispositions of Capital Assets, and Form 1040, Individual Income Tax Return.

It's important to note that the burden of reporting and paying taxes on cryptocurrency transactions falls on the owner, not the currency exchange. This means that individuals must keep records of their transactions, including receipts, confirmations, dates, times, and cost basis.

Calculating the capital gains or losses from cryptocurrency transactions involves taking the difference between the fair market value of the goods or services received and the adjusted cost basis, which includes the amount paid for the cryptocurrency plus any fees.

While not every crypto transaction is taxable, it's crucial to understand the tax implications of buying, selling, trading, mining, staking, and using cryptocurrencies as payment to stay compliant with IRS regulations.

Bitcoin and money laundering

Bitcoin is often thought of as the preferred currency of cybercriminals, who use it to purchase illicit goods and services, as well as to demand payments from ransomware attacks. The cryptocurrency is appealing to criminals due to the level of anonymity it provides, its ease of use, and its ability to circumvent international borders and legislation. Criminals can also use Bitcoin to ""cash out" large sums of money generated from cybercrime activities without being detected by authorities.

Money laundering using Bitcoin follows the general pattern of placement-layering-integration, but with some specific features. Cryptocurrencies are anonymous at their point of creation, so the placement stage of the money laundering process is often absent. It is free to create a cryptocurrency account, and each account can only be used twice: to receive money and then transfer it elsewhere. It is possible to create a large money laundering scheme with thousands of transfers at a low cost and execute it using a computer script.

Bitcoin mixers and exchanges are two key components of money laundering using Bitcoin. Bitcoin mixing services aim to disassociate bitcoins from their source, which is often of a criminal nature, while Bitcoin exchange services aim to convert bitcoins to spendable money anonymously. Bitcoin mixers typically provide customers with a new address to make a deposit, and then pay out other bitcoins from their reserve to Bitcoin addresses provided by the customer, after deducting a mixing fee. Some randomness is applied to the frequency and amount of payments/fees to create a guise of legitimacy.

The blockchain allows cybercriminals to identify the percentage link between the deposited and received Bitcoins following the mixing process, known as "taint". If the bitcoin mixing is performed correctly, there is no link ("zero per cent taint"). Some bitcoin mixing services can ensure that returning customers who have previously been issued a tainted bitcoin are not issued the same Bitcoin again in future transactions.

The study by Rolf van Wegberg et al. included an experiment where different bitcoin mixers and exchanges were tested to see how viable they were as a combined approach to money laundering through Bitcoin. The conclusion was that bitcoin mixing services on the dark web are partly scams and partly operational services. Of the five mixing services tested, three were scams (accepting Bitcoin but not returning anything), and two were operational. In terms of Bitcoin exchange services, the majority operated as promised, however with differing levels of anonymity afforded.

To maximize anonymity, criminals will prefer to utilize output platforms such as PayPal, allowing them to receive money with minimal registration requirements that may provide a link to their identity. The total cost of this type of cash-out strategy is less than 15% of the proceeds of crime, which is very low compared to other money laundering methods that can cost up to 50%.

While the legal status of Bitcoin in the United States is complex and fragmented, with varying laws and regulations across different states, it is worth noting that promoting cryptocurrency markets can be illegal if the activity is construed as a pump-and-dump scheme. This is defined by the CFTC as:

> "coordinated efforts to create phony demand (the pump) and then sell quickly (the dump) to profit by taking advantage of traders who are unaware of the scheme."

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