As of February 2020, Bitcoin was legal in the U.S., Japan, the U.K., and most other developed countries. In the emerging markets, the legal status of Bitcoin still varied dramatically. China heavily restricted Bitcoin without actually criminalizing the holding of bitcoins. India banned banks from dealing in bitcoins and left the overall legal status of cryptocurrencies unclear. In general, it is necessary to look at Bitcoin laws in specific countries.

Even where Bitcoin is legal, most of the laws that apply to other assets also apply to Bitcoin. Tax laws are the area where most people are likely to run into trouble. For tax purposes, bitcoins are usually treated as property rather than currency. Bitcoin is generally not considered legal tender.

Key Takeaways

  • As of February 2020, Bitcoin was legal in the U.S., Japan, the U.K., and most other developed countries.
  • In general, it is necessary to look at Bitcoin laws in specific countries.
  • In the U.S., the IRS has taken an increasing interest in Bitcoin and issued guidelines for taxpayers.
  • Bitcoin has serious flaws for those seeking anonymity, so illegal activity is moving to other cryptocurrencies.

IRS Guidance for U.S. Taxpayers

In the United States, the IRS has taken an increasing interest in Bitcoin and issued guidelines. In 2014, the agency issued IRS Notice 2014-21 to provide information on the tax treatment of virtual currencies. Virtual currency is the term that the IRS uses for cryptocurrency. In 2020, the IRS created a new tax form requiring taxpayers to declare if they engaged in any virtual currency transactions during 2019.

Other Legal and Regulatory Issues

Bitcoin exists in a deregulated marketplace, so there is no centralized issuing authority. Bitcoin addresses do not require Social Security Numbers (SSNs) or other personal information like standard bank accounts in the United States. That initially raised concerns about the use of bitcoins for illegal activity.

In its early years, the perceived anonymity of Bitcoin led to many illegal uses. Drug traffickers were known to use it, with the best-known example being the Silk Road market. It was a section of the so-called dark web where users could buy illicit drugs. All transactions on the Silk Road used bitcoins. It was eventually shut down by the FBI in October 2013.

However, Bitcoin has several serious flaws for those seeking anonymity. In particular, Bitcoin creates a permanent public record of all transactions. Once an individual is linked to an address, that person can be connected to other transactions using that address. Competing cryptocurrencies, such as Monero and Zcash, now provide much better privacy protection. Given this situation, illegal activity is moving away from Bitcoin.

Defining Bitcoin

The digital currency known as Bitcoin was created in 2009 by a person or organization using the alias Satoshi Nakamoto. The real identity of Satoshi Nakamoto has never been established. There are no physical bitcoins that correspond with dollar bills and euro notes. They exist only on the Internet, usually in digital wallets. Ledgers known as blockchains are used to keep track of the existence of bitcoin. It can be given directly to or received from anyone who has a bitcoin address via peer-to-peer transactions. Bitcoin also trades on various exchanges around the world, which is how its price is established.

Bitcoin can be transferred from one country to another without limitation. However, the exchange rate against government-backed currencies can be very volatile. That is partly because speculation often drives the price, but also because bitcoins have a relatively small market compared to traditional currencies.