Understanding the Legalities of Digital Currency

For many investors, cryptocurrency has become an attractive option to diversify portfolios. However, the regulations for digital currencies are not the same as those for fiat money (government-issued currency).  Investors must understand the legal aspects to avoid unpleasant surprises and consequences.



Cryptocurrency Is Property, Not Currency


It’s important to understand that in the United States, digital currency is classified as property.  Because of this, you will have to follow the law pertaining to capital gains when filing your taxes. Investors may want to consult a tax accountant who is familiar with digital currencies.



Legal Effects of Decentralization


Another important legal aspect of cryptocurrency is its decentralization. Cryptocurrency supporters highlight this as a benefit because there is no central agency controlling the currency. However, this has its own set of legal challenges. With no central authority to turn to for help, it can be incredibly challenging if a problem occurs.

The most common legal issue would be fraud. If someone scams another person out of their cryptocurrency, the previous owner doesn’t have any legal recourse. 





Anyone who invests in cryptocurrency should be sure to familiarize themselves with its legal aspects. Most importantly, you need to know how it is taxed. In the United States, the IRS considers digital currency property, so capital gains tax applies. The other crucial thing to remember is that digital currency is decentralized. There is no legal action that will return your money to you if you accidentally send cryptocurrency to a scammer.