Cryptocurrencies may be the next big thing in the world of finance but we are still not clear about its legal implications. As centralized banks and governments grapple to understand how digital currencies work and whether they can be regulated or not, individual investors are making hay while the crypto sun shines. But as an investor, do you know what the legal risks are when you invest in cryptos?
Legal risks involves in crypto investments:
- Property/tax: One of the key legal considerations for an investor is the way in which authorities look at crypto holdings. For instance, the Internal Revenue Service or IRS in the US defines cryptocurrencies as property. This automatically means that investors are liable to pay capital gains taxes and must report their crypto expenses or profits when filing yearly tax returns. This adds confusion in the minds of US taxpayers. According to a CNBS report, if an investor owns more than $10,000, he should fill up the FBAR or Report of Foreign Bank and Financial Accounts and give it annually to the Treasury Department. So, as a digital currency investor, it is in your best interest to consult tax professionals to find out whether you should report your gains and losses in crypto.
- Decentralized status: Another critical legal consideration for crypto investors is the decentralized status of cryptocurrencies. This means that these digital currencies are neither issued nor regulated by governments and banks, and there are no middlemen involved in transactions. So, individuals are technically free from such institutions or any jurisdiction. But, at the same time, this could cause legal problems. Value of the currencies will be dependent totally on speculations r on prices that investors will assign to them. When no central authority is involved, investors can land up in trouble if there are issues regarding ownership or transactions. There is no legal path of recourse in case something goes wrong in transfers.
- Business licensing: Many businesses are accepting cryptos as payment for their services. Businesses must obtain licenses and register themselves for operating in specific areas. But this is not clear where digital currencies are concerned because their legal status is still unclear. So, companies taking crypto payments may not be required to register or get licenses at all. It is entirely the business owner’s responsibility to ensure that proper legal norms are followed.
- Fraud/ Money laundering: It is argued that cryptocurrencies have made it easy for criminals to engage in illicit activities like forgery and money laundering. While this may not impact you directly if you do not use such technologies to commit offences, it may so happen that you end up becoming a victim of such fraud. Every time a crypto exchange is hacked, money can get stolen and there is no legal method to retrieve it anymore. This is why crypto investors take a lot of risk when they buy and hold assets. It is for this reason that crypto investors are strongly advised to keep their coins in secure wallets.