In recent years, cryptocurrencies have surged in popularity, attracting individuals who want more control over their finances. With thousands of different cryptocurrencies to choose from, finding some of the best crypto to buy now can be overwhelming. Renee Johnson from TechReport explains that several different factors go into deciding which crypto to invest in. This includes the tokenomics of the coin, market performance, and for newer tokens- how well it performs during the various stages of a presale.

However, the regulations and laws surrounding crypto are still evolving, varying significantly across jurisdictions. This uncertainty can create confusion for newcomers, eager to explore the cryptocurrency market. This guide will shed some light on the basics of the legalities of crypto.

Crypto Basics: What You Need to Know

Cryptocurrencies are digital coins or tokens that represent a new form of digital currency existing only online. Unlike traditional fiat currencies, cryptocurrencies like Bitcoin and Ethereum operate independently from any government or banking institution. 

At the heart of cryptocurrency lies blockchain technology, which serves as the digital ledger that records and verifies all transactions. Think of blockchain as a series of interconnected blocks. Each block holds information about various individuals exchanging cryptocurrency. Once a block is filled, it is securely linked to the previous block, creating a continuous chain. This means that every transaction is transparent and publicly accessible, allowing anyone to verify the history of crypto transactions.

Understanding Crypto Regulation

The regulatory landscape for cryptocurrencies is complex and varies widely. While the U.S. allows cryptocurrency trading, the rules governing this market are inconsistent across different states. For example, New York has strict rules for businesses dealing with crypto, while Wyoming is more friendly to crypto companies. Consumer protection within the crypto industry is also still developing, but the SEC is working to safeguard investors from fraud.

Securities Regulation and Cryptocurrencies

The Securities and Exchange Commission (SEC) is the government agency responsible for keeping consumers safe and determining whether certain financial instruments can be classified as securities. Security represents ownership of a company, allowing investors to profit if the company performs well.

When a cryptocurrency promises future profits or is managed by a group of individuals, it could potentially be classified as security by the SEC. This classification requires the crypto company to follow specific regulations regarding sales and reporting.

The SEC has been grappling with how to properly classify cryptocurrencies. Some cryptocurrencies function like traditional fiat currencies, but others might resemble owning a part of a company. Additionally, many cryptocurrencies, often referred to as tokens, complicate this classification further.

The SEC’s role in shaping the future of cryptocurrencies was highlighted in the high-profile case involving Ripple Labs, the creator of the XRP token. The SEC sought to determine whether XRP should be considered a security. Ripple won the case partially, however, they received a hefty fine of $125 million for selling XRP directly to institutional investors without registering it as a security. The outcome was significant for the crypto community, as it helped provide clarity on how digital assets like Bitcoin should be treated.

If the SEC decides to classify cryptocurrency as a security, it can affect how it can be marketed, sold, and traded. It also means non-compliance can lead to legal trouble if it doesn’t follow securities laws.

Crypto Taxation

The Internal Revenue Service (IRS) treats cryptocurrency as property. Income from activities like mining, staking, and most yield farming are subject to capital gains taxes. 

• Holding period: If you held the crypto coins for more than a year, you typically pay a lower capital gains tax rate. But if you sell it quickly, you’ll pay taxes at your regular income tax rate. 

• Tax Bracket: Your overall income and tax bracket influence how much tax you owe on capital gains, with higher-income individuals facing higher tax rates.

• Type of Transaction: How you use your cryptocurrency can affect the taxes you owe and has varying tax implications. For example, if you sell your Bitcoin for cash, that’s one type of crypto transaction. You might have to pay taxes on the money you made. But if you use your Bitcoin to buy something, that’s a different kind of transaction. There might be different taxes for that. And if you’re using your computer to mine Bitcoin, you might also owe taxes on the Bitcoin you earn.

• Cost Basis: The cost basis is simply what you paid for your crypto. When you sell it, you compare it to what you paid. This tells you if you made a profit or loss.

• State and Local Taxes: Some states have additional taxes on crypto gains. Be aware of your state’s regulations.

Remember, tax laws can be complex, and it’s essential to consult a tax professional or use tax software to calculate your crypto taxes.

Money Transmission Laws

Many states have laws to control how businesses handle sending money from one person to another. Platforms that facilitate the transfer of cryptocurrencies such as Ethereum and Bitcoin often need permission from the government to operate and must comply with specific rules. This is to make sure they’re following the rules so their crypto exchanges are fair and safe for users.

Tips for Beginners Navigating Crypto Legalities

The crypto world can be a legal minefield, especially for newcomers. Here are some helpful tips:

• Understand the Basics: Educate yourself about fundamental legal concepts related to cryptocurrency, such as securities regulations, tax implications, and consumer protection laws.

• Know Your Jurisdiction: Crypto regulations vary widely by state. Understand the specific laws where you reside and operate.

• Choose Reputable Platforms: Opt for crypto exchanges and wallets that are regulated and comply with local laws. This can reduce the risks associated with scams and fraud.

• Keep Detailed Records: Maintain meticulous records of all your crypto transactions. This is important for taxes and can also help if there are any disagreements.

• Reporting: Properly reporting your crypto transactions on your tax return is crucial. Failure to do so can result in penalties.

• Consider Professional Advice: If you’re making significant investments or running a crypto-related business, consult with a tax professional or attorney specializing in cryptocurrency.

• Stay Informed: Stay updated on regulatory changes and industry trends as things are ever-changing with cryptocurrency.