Cryptocurrency is a medium of exchange that uses cryptography to control the creation and transfer of ownership. It isn’t backed by any government or central bank, which means that its value isn’t tied to promises of future returns like a traditional currency, but rather based on supply and demand. Because of this, the value of a cryptocurrency can be volatile, and it’s important to research and invest wisely before buying into any cryptocurrency.
Regulation of cryptocurrencies varies across countries, and the United States is no exception. Some regulators take a more hands-off approach, while others seek to apply existing financial regulations to the new technology. For example, FinCen has proposed a rule that would make cryptocurrency exchanges regulated as money transmitters and subject to the same anti-money laundering (AML) and countering the financing of terrorism (CFT) requirements as banks. In contrast, the North American Association of Securities Regulators (NASAA) has taken a more consumer-friendly stance and works to encourage responsible investment in cryptocurrency.
In addition to varying regulatory approaches, many states also tax cryptocurrencies differently. Some treat them as property, with the capital gains tax applied to profits on their sale. Other states tax them as income, with the tax rate varying from state to state. Whether you’re investing in cryptocurrency or simply mining it for profit, understanding how the various tax rules impact your situation can help you determine whether or not it makes sense to do so.
Outside the US, regulations of cryptocurrencies vary widely as well. Some countries prohibit them entirely, while others are more welcoming. For example, in September of 2021, El Salvador became the first country to officially declare Bitcoin legal tender, and the president even airdropped $30 worth of the digital asset into every citizen’s wallet as a token of appreciation! The country now requires businesses to accept Bitcoin for payment, and its citizens can use it to pay for services and goods.
While the US hasn’t banned Bitcoin, it has cracked down on high-risk enterprises. Other countries, such as China, have taken a different approach and outright banned cryptocurrency trading. This is largely because the Chinese government is concerned that the volatile price of Bitcoin could spark an uncontrolled speculative bubble, leading to economic instability.
Other countries, such as Canada and Switzerland, have taken a more open-minded approach to the cryptocurrency industry. For example, the Canadian Revenue Agency treats cryptocurrencies as property for tax purposes and has no minimum investment requirement to receive capital gains benefits on their sale. Meanwhile, Switzerland is working to adapt existing banking laws to include cryptos and establish a regulatory framework that balances innovation with consumer protections.