Are you trying to learn about cryptocurrency laws in the USA? As cryptocurrency becomes more mainstream and accepted as an investment, even for home buying, many people might be wondering what legal obligations they have if they own cryptocurrency. Even though cryptocurrency is becoming more popular, it’s still decentralized, so there’s no entity or government in charge of it. 

Ultimately, there are very few protections for consumers who invest in crypto. Instead, there are two bodies in charge of regulating crypto. The Commodities Futures Trading Commission (CFTC) regulates futures, swaps, and options, while the Securities and Exchange Commission (SEC) monitors new cryptocurrencies and ICOs. In this article, we’ll help you understand cryptocurrency laws and regulations.

When playing around with Bitcoin or another cryptocurrency, you need to be careful of money laundering. You could be accused of it. Congress, the Internal Revenue Service (IRS), the Central Bank, and the Treasury have made it clear that digital currency is associated with crime.

There are a number of anti-money laundering laws, and also the Bank Secrecy Act. The industry is full of fraud companies, but there have been some successful companies as well, like Coinbase. Ethereum has also done well for the most part. Not everyone is a fraud.

That being said, there exists a real need for consumer protection to avoid another “Luna coin.” Read on.

Lack of Cryptocurrency Regulation

Blockchain technology transfers assets without verification from an outside entity such as a bank or government. The lack of need for the government or any governing body to control and regulate crypto, paired with the amount of money involved in trading crypto, has made lawmakers interested in how they can begin regulating crypto to protect the public and prevent fraud. 

However, crypto popularity has happened so quickly, and many investors are pushing for regulation in the U.S. As a result, the Senate has been discussing ways to begin passing laws regarding cryptocurrency. Last year, an infrastructure spending package was passed, which originally included provisions about cryptocurrency.

Unfortunately, when the package was passed, cryptocurrency was taken out. The original draft of the infrastructure spending package had a proposition requiring crypto brokers to report tax information to the IRS just like other types of brokers. Unfortunately, lawmakers couldn’t agree on what makes someone a crypto broker. 

It’s been clear that financial institutions have been mostly fighting against crypto, or at the very least, fighting for a regulatory framework.

Agencies Advocating for Crypto Laws

As we’ve mentioned, two government bodies are advocating for crypto laws, including the SEC and CFTC. Many lawmakers are becoming more interested in crypto exchanges. The SEC believes that cryptocurrency can be a good thing but requires regulatory oversight. The government’s role in regulation includes protecting the public from fraud.

For example, schemes are common in cryptocurrency and force the value of cryptos to skyrocket while the perpetrators become rich as they buy low and sell high to make a profit. Schemes won’t go away overnight, even with regulation. However, regulation can help prevent schemes and protect the public. 

Cryptocurrency is unregulated and considered an asset in the U.S. However, further regulation may make Bitcoin and other cryptocurrencies safer to invest in by decreasing volatility and the potential for criminal transactions. 

USA Current Crypto Laws and Regulations

While there is no central agency in charge of regulating cryptocurrency, some laws are already in place. These laws include:

Taxes on Capital Gains

While cryptocurrency is decentralized, you still have to pay taxes on anything you earn from investing. According to Young and the Invested, the IRS views cryptocurrency as property, so trading cryptocurrency has tax regulations you must follow. Because crypto is a capital asset, you must track your capital gain or loss and report it on your taxes.

You can track your crypto gains using professional tax software to help you understand how much you paid for it versus how much you earned. For example, if you bought $200 worth of crypto and sold it in that same year for $2,000, your capital gain is $1,800. 

If you use your crypto to pay for something like you would a fiat currency, you would also pay taxes based on its use to pay. 

CFTC Regulations and Cryptocurrency Laws In the USA

The CTFC does not regulate commodities, but they do regulate derivatives, which can have cryptocurrencies as underlying assets, so they can regulate crypto futures. Crypto futures are contracts between investors that bet on the future price of crypto, allowing investors to learn about crypto without purchasing them. They can also regulate swaps (exchanges of crypto from separate blockchains). 

State Laws

Many states have taken an interest in crypto and started enacting their own laws to protect consumers. 

New York State

The state of New York requires entities holding or trading crypto to have a BitLicense. A BitLicense is issued by the New York State Department of Financial Services (NYSDFS) and is designed for companies and nonprofits conducting business in New York.

Louisiana

Louisiana recently adopted cryptocurrency regulation requiring any company that exchanges, administers, or holds virtual currencies like Bitcoin to get a license. 

Wyoming

Wyoming is a crypto-positive state that has implemented over 20 crypto laws. The state was the first to enact blockchain legislation and established digital assets as intangible property. Additionally, Wyoming cryptocurrency is tax-free, with no state taxes on crypto earnings. 

Importance of Regulation 

Cryptocurrency can be a great diversification tool for inventors. Additionally, crypto offers investors the opportunity to transact across borders without the need for a third-party intermediary like a bank. However, with new crypto applications, such as NFTs and tokenization, it’s difficult for regulatory agencies to define what value is and how it can be transacted. 

Additionally, there is yet to be any regulation of cryptocurrencies internationally, although international governments are assessing the risks and trying to come up with their own policies as a response to the increasing crypto popularity. 

Banks and regulators have been watching crypto closely in hopes of stabilizing monetary systems and promoting economic growth while protecting the consumer by preventing fraud and protecting the integrity of the market. Because crypto trading happens across borders and transactions are quick, countries and organizations must work together to assess risk and establish similar standards for lawmaking surrounding crypto. 

Blockchain as digital currency

Phone apps have made it very easy for people to access cryptocurrency exchanges. Fintech has been around for a long time, and ledger technology is nothing new. But for some reason, people got really excited about Bitcoin.

There was a drive to avoid dependence on the U.S. dollar around the world and to use stablecoins instead. And securities laws were slow to catch up, so a lot of fraud happened in the early days of cryptocurrency exchanges.

That being said, these days there is significant investor product and financial regulation in place for cryptocurrency, and you cannot ignore the laws.

If you do whatever you want, law enforcement, the U.S. Treasury and the U.S. Government is going to come down on you hard.

The Future of Cryptocurrency Laws In the USA

As crypto becomes more popular, you can expect to hear about the different types of laws suggested by governments around the world. However, the main goal of these regulations will always be to protect the consumer and prevent abuse and crime. In addition, Crypto regulation can provide more stability within the market to reduce speculation and lead to higher investor confidence to draw in more long-term, savvy investors. 

Additionally, regulations can increase protections similar to the stock market to make cryptocurrency investing less risky. Of course, volatility will likely always be a common trait of crypto investing. Still, protections can make the market less vulnerable to fraud and scams, both of which are prevalent today and can force people to lose money based on false, fraudulent information about different companies and their value. 

When it comes to cryptocurrencies, the USA is currently lagging behind many other countries in terms of regulation. This lack of clarity can cause problems for both investors and businesses, as there is a risk of running afoul of the law without even realizing it. Combined with the volatile nature of crypto, this can create a minefield for the unwary.

In this article, we’ll explore the key cryptocurrency laws in the USA and offer some advice on how to stay on the right side of the law.

Crypto’s Long Journey Toward Legitimacy

Far from its beginnings as an anarchist project or dark web currency, cryptocurrencies have become a significant force in the global economy. As of June 2022, the total market capitalization of all cryptocurrencies was over $538 billion—excluding Bitcoin. With Bitcoin accounted for, that figure jumps to $1.238 trillion!

Given the growing popularity and value of cryptocurrencies, it is perhaps unsurprising that government agencies are starting to take notice and attempt to bring them under control.

The U.S. Securities and Exchange Commission (SEC), for instance, recently made waves for its crackdown on Initial Coin Offerings (ICOs) and their CEOs.

The Internal Revenue Service (IRS) has also weighed in, stating that they will treat cryptocurrencies as property for tax purposes. This means that any gains or losses from buying, selling, or trading cryptocurrencies will be subject to capital gains tax.

The culmination of these attempts is President Biden’s Executive Order on Ensuring Responsible Development of Digital Assets. Signed in March 2022, the order establishes a working group, to be led by the Treasury Department, which will develop a regulatory framework for digital assets.

So, what does this all mean for you? If you live in the USA and want to get involved in the world of cryptocurrencies, there are a few things you need to keep in mind to stay on the right side of the law.

The Most Important Crypto Laws in the U.S.

Keeping up with the vast array of cryptocurrency laws can be dizzying. Staying on top of all the current rules as well as the future regulations can be a full-time job in and of itself. And that’s in addition to the actual task of buying, selling, or trading cryptocurrencies!

However, there are a few key laws that everyone should be aware of. These laws cover the most common activities related to cryptocurrencies and will help smoothen your journey.

Cryptocurrency Laws In USA – Identity verification requirements

As we alluded to earlier, the early days of cryptocurrencies were essentially the Wild Wild West. With no government regulation, there was no way to know who was behind a particular transaction.

This anonymity made cryptocurrencies the perfect tool for criminals and terrorists, who used them to launder money and finance illegal activities. In response, many countries have introduced strict Know-Your-Customer (KYC) and Anti-Money Laundering (AML) laws.

The U.S. Financial Crimes Enforcement Network (FinCEN) held in 2013 that cryptocurrency exchanges are to be classified as “Money Services Businesses”. That makes them within the purview of KYC and AML laws, which require exchanges to verify the identity of their customers. Since then, U.S. crypto exchanges require you to submit several forms of identification, as well as a selfie picture.

You can circumvent these restrictions by using a Virtual Private Network (VPN) or by using a decentralized exchange (DEX), which doesn’t require identity verification. This will, of course, come with its own set of risks that will leave you holding the bag if things go wrong.

Crypto investments

According to IRS Notice 2014-21, cryptocurrencies are classified as property for tax purposes. This enables several things, such as crypto-backed loans, and means that any gains or losses you make from buying, selling, or trading cryptocurrencies will be subject to capital gains tax.

Let’s see how this works.

Say that you go out and buy 1 BTC for $10,000 today The price of Bitcoin doubles and you cash out, netting a $10,000 profit.

Since cryptocurrencies are considered property, that $10,000 profit is subject to capital gains tax: short-term for gains made within a year, and long-term for gains made after holding for more than a year. Your tax rate will be determined by your income level.

On the other hand, if the price fell to $5,000, you would have a $5,000 capital loss. This loss can be used to offset other capital gains or up to $3,000 of ordinary income.

If the potential swings in price make crypto investments too risky for you, we suggest considering stablecoins. Stablecoins are pegged to a stable asset—the USD is one popular example—and are thus not subject to the same volatility as other cryptocurrencies.

Crypto as a salary

If your company is paying employees cryptocurrency, you need to be aware of the tax implications.

Owing to the standards set out by the Fair Labor Standards Act, many states require that your base pay and overnight pay be in USD. Bonuses and incentives can be paid out in cryptocurrency. You are, in turn, obligated to report your cryptocurrency earnings as personal income and pay the relevant taxes—as their value shifts, so too will the taxes you owe.

You should also be aware that some states have different requirements when it comes to paying salaries in cryptocurrency. It’s always best to consult with an accountant or financial advisor to ensure that you comply with state and federal law.

Cryptocurrency Laws In USA and Mining crypto

The crypto world has received a lot of flak for its energy-hungry mining process. And it’s true that the process of verifying and adding transactions to the blockchain—what miners do—isn’t exactly environmentally friendly.

While the public and political reaction to this has been mixed, it appears safe to assume that mining cryptocurrencies are here to stay for the foreseeable future. As long as your state allows it, and you have the set-up for it, there’s no reason why you can’t get in on the action.

The possibilities cryptocurrencies present are virtually limitless. However, it’s important to be aware of the legal landscape surrounding them before taking the plunge.

By understanding the law, you can make informed decisions about how to best take advantage of cryptocurrencies. And with that knowledge, you can confidently enter the world of digital assets and reap the rewards.

Getting away from the money laundering roots

We hope you found this guide on cryptocurrency laws in the USA helpful. There’s a lot of potential for crypto as a recordkeeping and payment system. We just need to get all the frauds out of the industry first.

It will be a while before Bitcoin is truly seen as legal tender or as a stable asset class. Hopefully one day everyone uses it as a medium of exchange.

We hope you found this guide on cryptocurrency laws in USA helpful.

Author: Ashley Nielsen earned a B.S. degree in Business Administration Marketing at Point Loma Nazarene University. She is a contributing writer at 365businesstips.com where she shares knowledge about general business.