Are Cryptocurrencies Legal in the US?

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Is Bitcoin Considered Money?

Money, as we use the term in the modern world, refers both to monetary objects, or money in its physical form, and monetary value (credit), the right to receive monetary objects.

In the United States, the federal government has the sole power to bestow the status of legal tender upon monetary objects. The U.S Constitution bestows upon Congress the exclusive power “to coin Money, [and] regulate the Value thereof.”

This is defined by the Supreme Court as follows: "To determine what shall be lawful money and a legal tender is in its nature and of necessity a governmental power. It is in all countries exercised by the governments.” It follows that Congress has the sole power “to issue obligations of the United States in such form, and to impress upon them such qualities of money…as accord with the usage of sovereign governments. The power…was a power universally understood to belong to sovereignty."

The legal status of Bitcoin is undetermined in the US and elsewhere. Many governments around the world have yet to reach a consensus on the subject. The US has not yet granted legal tender status to Bitcoin or any other digital currency. Bitcoin, as of now, is neither legal tender nor considered currency in the US. The question as to whether Bitcoins can be considered money in the traditional legal sense is still up for debate. Initial case law has thus far concluded that Bitcoin is defined as "property" and not "currency" under federal law.

Public Law and Bitcoin

The primary purview of public law is legislation that governs relationships between individuals and the government, and those relationships between individuals that are of direct concern to the society as a whole. As is evident from the seven congressional hearings on Blockchain and digital currencies in the past four years, cryptocurrencies are considered by US public law to be of concern to the society as a whole. This means it is only a matter of time before laws are drafted to regulate its use. As of now, however, law enforcement and regulatory bodies are still in the process of clarifying the extent to which existing laws and regulations apply to Bitcoin. The fact is, nothing quite like it has ever existed. As a result, Bitcoin is not currently regulated on a federal level in the US.

The US Regulatory Regime

The Bank Secrecy Act (the “BSA”) is the primary Anti-money-laundering and CTF regulatory framework in the US and FinCEN (Financial Crimes Enforcement Network) is the agency delegated to enforcing these regulations.

In March 2013, FinCEN issued interpretive guidance to clarify the BSA as it pertains to cryptocurrencies. A convertible virtual currency as defined by FinCEN is “a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency” and “has an equivalent value in real currency, or acts as a substitute for real currency.” FinCEN characterizes Bitcoin as a decentralized virtual currency for purposes of the BSA.

The guidance clarifies that a user who obtains convertible virtual currency and uses it to purchase real or virtual goods or services is not considered an MSB (money services business). However, FinCEN considers that administrators or exchangers of centralized virtual currencies and exchangers of decentralized virtual currencies are money transmitters and are therefore subject to the BSA.

The US Investment Regime

Securities and commodities regulations focus on two different legal issues involving Bitcoin: (a) investments purchased with Bitcoins; and (b) investment directly in Bitcoins.

The Securities Exchange Commission (SEC) has the authority to regulate securities and securities-based derivatives as well as their respective markets. The CFTC (Commodity Futures Trading Commission) is the regulatory body responsible for overseeing the on- and off-exchange trades of futures contracts. The primary statute that gives power to the CFTC is the Commodity Exchange Act (the “CEA”). Although the SEC and CFT have yet to formally express their opinions on whether the purchase of Bitcoins is a commodity or a securities transaction, there are arguments to be made for both. First, it can be argued that Bitcoin could be considered an investment contract because it passes the four factors of the Howey test and second, the CFT has already approved a Bitcoin derivatives market plan, and Bitcoin futures are already being traded on the CME and CBOE derivatives market.

The US Tax Regime

In late March 2014, the IRS issued guidance that explained how existing general tax principles apply to virtual currencies like Bitcoin. The IRS has determined that Bitcoins are not “currency” for tax purposes. Instead, Bitcoins are taxed as “property.”

According to the IRS, the use of virtual currency is a “realization” event and the amount realized is the fair market value of the property received. Also, the sale of virtual currency results in a taxable gain or loss that is calculated by subtracting the seller’s basis from the amount realized in any sale.

The characterization of the gain or loss is based on whether the seller is an investor holding virtual currency as a capital asset (capital gain or loss) or engaged in a trade or business where the seller holds the virtual currency as inventory or other property (ordinary income or loss).

Individual miners are required to include the fair market value of the mined virtual currency as of the date of receipt of their gross income. Furthermore, if the miner engages in the mining activity in the course of its trade or business and not as an employee, the taxpayer is required to pay self-employment tax on the net earnings from such earnings.

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