As of June 2021, 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 bitcoin 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 law is the area where most people are likely to run into trouble. For tax purposes, bitcoin is usually treated as property rather than currency. However, there are exceptions, such as El Salvador becoming the first county to recognize bitcoin as legal tender in June 2021.

Key Takeaways

  • As of June 2021, 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 has issued guidelines for taxpayers.
  • Bitcoin appears to have flaws for those seeking anonymity, so illegal activity is moving to other cryptocurrencies.

IRS Guidance for U.S. Taxpayers

In the U.S., the Internal Revenue Service (IRS) has taken an increasing interest in bitcoin and has 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. For 2020, the IRS added a question on the first page of Form 1040 requiring taxpayers to declare if they engaged in any virtual currency transactions.

The 2020 IRS Form 1040 asks: "At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?"

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 U.S. That initially raised concerns about the use of bitcoin 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 bitcoin. 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 or euro notes. It exists only on the Internet, usually in digital wallets.

Ledgers known as blockchains are used to keep track of the existence of bitcoins. 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 generally be transferred undetected from one country to another on various exchanges because of its decentralized nature. It is important to be aware of the laws where your Bitcoin transactions take place and understand that even in countries where it is legal, the exchange rate against government-backed currencies can be very volatile.