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Legal Guide for Cryptocurrency Investors - What You Need to Know

Cryptocurrencies have captured the public’s imagination, becoming one of the most widely discussed financial innovations in recent years. If you follow news on crypto, you can see there are a lot of things happening in this field each day.

The fact is, we’re still in the early days of this new digital asset class, and the regulatory landscape around it continues to evolve. As a result, it can be challenging for individuals who want to get involved with cryptocurrencies to understand where and how to start. If you’re new to the world of cryptocurrency investing, you’ve come to the right place. This article is a legal guide designed to answer the most frequently-asked questions around investing in cryptocurrencies.

What does the law say about trading cryptocurrencies?

Investors who are interested in trading cryptocurrencies must first understand the differences between a speculator and a trader. A speculator buys and sells cryptocurrencies on the basis of expected profit, while a trader may also hold some assets (such as cryptocurrencies, ICO tokens, NFT or crypto art) as a long-term investment. There are also professional traders who handle cryptocurrency trades for clients.

When it comes to trading cryptocurrencies, each state has its own set of rules. While many U.S. states have yet to address cryptocurrencies specifically, most recognize that digital assets fall under existing securities laws.

In addition to these states, it is also important to note that the state of Wyoming has a very interesting and unique law with regards to cryptocurrencies. The law in question stipulates as follows:

"The sale or offer for sale by any person, directly or indirectly engaged in business, of securities registered under this chapter shall be deemed unlawful unless such securities are sold only upon delivery thereof at the place designated therein."

Is it risky to invest in cryptocurrencies?

Cryptocurrencies are not risk-free assets. Like any other financial assets, cryptocurrencies carry price volatility risk. A cryptocurrency’s price could rise or fall at any given moment, making the potential returns from holding the asset potentially unpredictable. Due to the recent growth of the cryptocurrency market, many new investors may believe that cryptocurrencies are a more accessible investment vehicle than they actually are. While it’s true that cryptocurrencies can be traded online and even bought and sold with fiat currency, they are not a mainstream investment method. In fact, only a small percentage of people even know that they exist.

Is it illegal to own cryptocurrencies?

No, it is not illegal to own cryptocurrencies. Like all financial assets, it is up to the individual to decide what, if anything, to do with their cryptocurrencies. The only thing that is illegal is if a person owns cryptocurrencies with the intention of committing a crime.

How secure are cryptocurrencies?

Like any other financial asset, cryptocurrencies are only as secure as the system can make them. In other words, the more popular and successful cryptocurrencies become, the more secure they will be.

Cryptocurrencies are virtual, decentralized currencies that operate via blockchain technology. There is a limited supply of cryptocurrencies in circulation and no central bank or government can control their creation like other fiat money (tied to a specific country,) which means they cannot be inflated at will. The anonymous nature of these tokens also makes them difficult for hackers to steal from centralized exchanges, as this would require hacking into every single node on the network simultaneously -- something even large-scale state actors struggle with.

What are the tax implications of cryptocurrency investing?

Cryptocurrencies are not conventional investments. While some people liken them to stocks, bonds, or gold, these assets are actually tangible items that can be touched or held in the hand. Cryptocurrencies, on the other hand, exist solely as computer software. They are not tangible, and therefore, they do not generate income or require any sort of beneficence.

Because of these factors, it’s important for cryptocurrency investors to understand how they are treated for tax purposes. For example, if you bought $10,000 of Bitcoin in 2013 and recently sold the coins for $8,000, you would have a $2,000 gain for the year, and as a result, you would owe taxes on that $2,000 gain. In a traditional investment scenario, where you bought shares of a company, you would only have taxable trading gains if you sold the shares at a profit.

Bottom line

As with any investment, it’s important to do your due diligence before diving in head first. Keep in mind that cryptocurrencies are new and volatile assets, and as with any new investment, there are associated risks. If you’re interested in investing in cryptocurrencies, consider speaking with a financial advisor first to learn more about the market, the assets themselves, and the legal issues related to cryptocurrency investment.