The peer-to-peer digital currency bitcoin made its debut in 2009, ushering in a new era of cryptocurrency. While tax authorities, enforcement agencies, and regulators worldwide are still debating best practices, one pertinent question is: Is bitcoin legal or illegal? The answer depends on the location and activity of the user.

Bitcoin is not issued, endorsed, or regulated by any central bank. Instead, it is created through a computer-generated process known as mining. In addition to being a cryptocurrency unrelated to any government, bitcoin is a peer-to-peer payment system since it does not exist in a physical form. As such, it offers a convenient way to conduct cross-border transactions with no exchange rate fees.

Consumers have a greater ability to purchase goods and services with bitcoin directly at online retailers, pull cash out of bitcoin ATMs, and use bitcoin at some brick-and-mortar stores. The currency is being traded on exchanges, and virtual currency-related ventures and initial coin offerings (ICOs) draw interest from across the investment spectrum. While bitcoin appears at a glance to be a well-established virtual currency system, there are still no uniform international laws that regulate bitcoin.

Key Takeaways

  • Bitcoin, the cryptocurrency, is not regulated by a central bank and is not printed—it is computer-generated via mining.
  • Despite its use for buying goods and services, there are still no uniform international laws that regulate bitcoin.
  • Many major and developed countries allow the use of bitcoin, such as the U.S., Canada, and the U.K.
  • Other countries, however, are opposed to any use of bitcoin, including China and Russia.

Countries That Say Yes to Bitcoin

Bitcoin can be used anonymously to conduct transactions between any account holders, anywhere and anytime across the globe, which makes it attractive to criminals and terror organizations. They may use bitcoin to buy or sell illegal goods like drugs or weapons. However, that trend has shifted lately, as criminals move away from bitcoin for fear of being tracked.

Most countries have not clearly determined the legality of bitcoin, preferring instead to take a wait-and-see approach. Some countries have indirectly assented to the legal use of bitcoin by enacting some regulatory oversight. However, as of June 2021, El Salvador is the only country that recognizes bitcoin as legal tender.

The United States

The United States has taken a generally positive stance toward bitcoin, though several government agencies work to prevent or reduce bitcoin use for illegal transactions. Prominent businesses like Dish Network (DISH), Microsoft, Subway, and Overstock (OSTK) welcome payment in bitcoin. The digital currency has also made its way to the U.S. derivatives markets—adding to its legitimacy.

The U.S. Department of Treasury's Financial Crimes Enforcement Network (FinCEN) has been issuing guidance on bitcoin since 2013. The Treasury has defined bitcoin not as currency, but as a money services business (MSB). This places it under the Bank Secrecy Act, which requires exchanges and payment processors to adhere to certain responsibilities like reporting, registration, and record keeping.

In addition, bitcoin is categorized as property for taxation purposes by the Internal Revenue Service (IRS).

Canada

Like its southern neighbor, the U.S., Canada maintains a generally bitcoin-friendly stance while also ensuring the cryptocurrency is not used for money laundering. Bitcoin is viewed as a commodity by the Canada Revenue Agency (CRA).

This means bitcoin transactions are viewed as barter transactions, and the income generated is treated as business income. The taxation also depends on whether the individual has a buying-selling business or is only concerned with investing.

Canada considers bitcoin exchanges to be money service businesses. This brings them under the purview of the anti-money laundering (AML) laws. Bitcoin exchanges need to register with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), report any suspicious transactions, abide by the compliance plans, and even keep certain records. In addition, some major Canadian banks have banned the use of their credit or debit cards for bitcoin transactions.

Australia

Similar to Canada, Australia considers bitcoin neither money nor a foreign currency, with the Australian Taxation Office (ATO) ruling it an asset for capital gains tax purposes.

The European Union

On Oct. 22, 2015, the European Court of Justice (ECJ) ruled that buying and selling digital currencies is considered a supply of services and that this is exempt from value-added tax (VAT) in all European Union (EU) member states. Additionally, some individual EU countries have also developed their own bitcoin stances.

In Finland, the Central Board of Taxes (CBT) has given bitcoin a VAT exempt status by classifying it as a financial service. Bitcoin is treated as a commodity in Finland and not as a currency.

The Federal Public Service Finance of Belgium has also made bitcoin exempt from VAT. In Cyprus, bitcoin is not controlled or regulated either.

The Financial Conduct Authority (FCA) in the United Kingdom has a pro-bitcoin stance and wants the regulatory environment to be supportive of the digital currency. Bitcoin is under certain tax regulations in the U.K.

The National Revenue Agency (NRA) of Bulgaria has also brought bitcoin under its existing tax laws. Germany is open to bitcoin, where it is considered legal but taxed differently depending upon whether the authorities are dealing with exchanges, miners, enterprises, or users.

El Salvador

El Salvador is the only country in the world to allow bitcoin as legal tender. In June 2021, the country's Congress approved a proposal by President Nayib Bukele to formally adopt bitcoin as a form of payment.

Countries That Say No to Bitcoin

While bitcoin is welcomed in many parts of the world, a few countries are wary because of its volatility, decentralized nature, perceived threat to current monetary systems, and links to illicit activities like drug trafficking and money laundering. Some nations have outright banned digital currency, while others have tried to cut off any support from the banking and financial system essential for its trading and use. 

China

Bitcoin is essentially banned in China. All banks and other financial institutions like payment processors are prohibited from transacting or dealing in bitcoin. Cryptocurrency exchanges are banned. The government has cracked down on miners.

Russia

Bitcoin is not regulated in Russia, though its use as payment for goods or services is illegal.

Vietnam

Vietnam's government and its state bank maintain that bitcoin is not a legitimate payment method, though it is not regulated as an investment.

Bolivia, Columbia, and Ecuador

El Banco Central de Bolivia has banned the use of bitcoin and other cryptocurrencies. Columbia does not allow bitcoin use or investment. Bitcoin and other cryptocurrencies were banned in Ecuador by a majority vote in the national assembly.

The Bottom Line

Although bitcoin is over 10 years old, many countries still do not have explicit systems that restrict, regulate, or ban the cryptocurrency. The decentralized and anonymous nature of bitcoin has challenged many governments on how to allow legal use while preventing criminal transactions. Many countries are still analyzing ways to regulate the cryptocurrency. Overall, bitcoin remains in a legal gray area for much of the world.