Are There Legal Risks When Investing in Crypto?

Posted on: April 8, 2019

Cryptocurrencies as Property

One of the most critical legal considerations for any cryptocurrency investor has to do with the way that central authorities view cryptocurrency holdings. In the U.S., the IRS has defined cryptocurrencies as property, rather than as currencies proper. This means that individual investors are beholden to capital gains tax laws when it comes to reporting their cryptocurrency expenses and profits on their annual tax returns, regardless of where they purchased digital coins.

Fraud and Money Laundering

There is a widespread belief that cryptocurrencies provide criminal organizations with a new means of committing fraud, money laundering, and a host of other financial crimes. This may not directly impact most cryptocurrency investors who do not intend to use this new technology to commit such crimes. However, investors who find themselves in the unfortunate position of being a victim of financial crime do not likely have the same legal options as traditional victims of fraud.

This issue also relates to the decentralized status of digital currencies. When a cryptocurrency exchange is hacked and customers’ holdings are stolen, for instance, there is frequently no standard practice for recovering the missing funds.

Decentralized Status

Another potential risk associated with cryptocurrencies as a result of their decentralized status has to do with the particulars of transactions. In most other transactions, currency with a physical presence changes hands. In the case of electronic money, a trusted financial institution is involved in creating and settling deposits and debt claims. Neither of these concepts applies to cryptocurrency transactions. Because of this fundamental difference, legal confusion between parties in various types of digital currency transactions is a real possibility. Once again, because of the decentralized state of these currencies, the path of legal recourse in these situations can be difficult to assess.