With the launch of bitcoin in 2009, a new era in cryptocurrency began. As tax authorities, enforcement agencies, and regulators debate best practices, one pertinent question is: Is bitcoin legal? This is largely determined by your location and activity.
No central bank endorses or regulates Bitcoin. It is instead created by a computer-mediated process known as mining. Since bitcoin does not exist in a physical form, it is a peer-to-peer payment system as well as a cryptocurrency. As such, it facilitates cross-border transactions without paying exchange rates.
Customers have the option of purchasing goods and services with bitcoin at online retailers, withdrawing cash from bitcoin ATMs, and using bitcoin at some brick-and-mortar shops. Virtual currencies are traded on exchanges, and ICOs and other ventures with virtual currencies attract investors from different fields. A glance at bitcoin may suggest that it is a well-established virtual currency, but no international law regulates it uniformly.
Let’s jump right into it to see is Bitcoin legal, where, and why!
Is Bitcoin Legal? Reasons Why It Is Not
Bitcoin is primarily problematic due to its potential for tax evasion. Revenue from the United States' income tax is collected each year. No matter what currency the income is in, it is not subject to Federal income tax. In theory, USD, Ithaca HOURS, and, in practice, Bartering is all taxable.
It is not clear how coins relate to users in Bitcoin. There is a map between coins and addresses, and only the owner knows what addresses belong to him. If the United States government wanted to determine a person's Bitcoin income, it would have to hack into their account(s).
Since addresses cannot be mapped to nationalities, the United States government is also unable to implement sale taxes in Bitcoin. So it is impossible to determine how much tax should be charged on each transaction and where it should be paid.
Black Markets’ Paradise
A very bad consequence of legalizing Bitcoin is that it becomes a haven for black markets.
The two properties of Bitcoin make it perfect for black market transactions. It is anonymous, for starters. There can be transactions in which a product is sold and purchased without the buyer and seller knowing where the item came from. The result is that sellers of contraband products can sell their products to customers without being concerned that their products will be identified by police.
In a second transaction, the contraband seller can change their address. It would be far more difficult to figure out how many people were selling contraband in this case.
Money Laundering Paradise
A person only needs two Bitcoin accounts to land their money. With Account A, laundered USD is exchanged for Bitcoins. Account B would purchase those coins from Account A under a different address. Bitcoins would then be exchanged for legitimate US dollars by Account B. The user of Account B and the account are perfectly legitimate as long as Account A remains hidden from the police.
Due to the lack of physical and bank interactions, traditional money laundering makes it more difficult to trace the money. Moreover, the launderers could change the names of both accounts to disguise their activities.
Bitcoin: Countries That Accept It
The anonymity that Bitcoin provides allows any account holder, anywhere and anytime worldwide, to conduct transactions anonymously, which appeals to criminals and terror groups. Criminals are able to purchase and sell products such as drugs and weapons using bitcoins. However, this trend has been shifting recently as criminals who fear being tracked have turned away from bitcoin.
It is a waiting-and-see approach that most countries have followed when it comes to determining bitcoins' legality. As a result of some regulatory oversight, some countries have informally acknowledged bitcoin's legality. El Salvador is, however, the only country recognizing bitcoin as legal tender as of June 2021.
The United States
Although there are government agencies working to prevent or reduce the use of bitcoin for illegal purposes, the United States has generally taken a positive stance toward bitcoin. Several large businesses accept bitcoin payments, including Dish Network, Microsoft, Overstock, and Subway. It has also been integrated into the United States' derivatives markets, adding to its legitimacy.
Regulatory guidance on bitcoin has consistently been issued by FinCEN, the Financial Crimes Enforcement Network of the U.S. Department of Treasury. Money services business (MSB) is how the Treasury defines bitcoin, not currency. The exchange and processor are therefore covered by the Bank Secrecy Act, which requires certain responsibilities such as reporting, registering, and maintaining records. In addition, Bitcoin is viewed as a type of property by the IRS for taxation purposes.
In comparison to its southern neighbor, the U.S., Canada is generally friendly toward cryptocurrencies while also making sure that they are not used for money laundering. CRA (Canada Revenue Agency) views bitcoin as a commodity.
In other words, bitcoin transactions are considered barter transactions, and the income generated is considered business income. It is also taxed differently depending on whether someone is only concerned with investing or if they have a business that involves buying and selling.
A bitcoin exchange is considered a money service business in Canada. Consequently, they are now subject to AML laws. In addition to registering with FINTRAC, reporting suspicious transactions, complying with regulations, and even keeping certain records, cryptocurrency exchanges must also and register with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). The use of debit and credit cards for bitcoin transactions has also been banned by some major Canadian banks.
The Australian Taxation Office (ATO) rules that bitcoin is an asset subject to capital gains tax, similar to the position of Canada.
The European Union
According to a ruling from the European Court of Justice (ECJ) on Oct. 22, 2015, digital currency transactions are considered a supply of services and therefore exempt from value-added tax (VAT) in the European Union (EU). There are also some individual EU countries with their own positions on bitcoin.
By classifying bitcoin as a financial service, the Central Board of Taxes (CBT) in Finland has granted it VAT exemption status. Unlike in other countries, Bitcoin is not treated as a currency in Finland.
Also, bitcoin is now tax-exempt in Belgium, thanks to the Federal Public Service Finance. Similarly, bitcoin is not regulated or controlled in Cyprus.
In the United Kingdom, the Financial Conduct Authority (FCA) holds a pro-bitcoin position, and they want the regulatory environment to support the digital currency. A number of tax regulations surround bitcoin in the United Kingdom.
Bitcoin has also been brought under the Bulgarian national tax laws by the National Revenue Agency (NRA). German authorities have legalized bitcoin, but treat it differently based on whether their customers are exchanges, miners, enterprises, or users.
Several years ago, the Israeli Tax Authorities released a statement ruling that bitcoin and other cryptocurrencies are not considered currencies nor financial securities, but rather taxable assets. Capital gains tax of 25% is due each time a bitcoin is sold. Traders and miners of bitcoins would be considered businesses and be subject to corporate income taxes as well as a 17% VAT.
Currently, El Salvador is the only country to accept bitcoin as legal tender. In June 2021, Nayib Bukele's proposal for adopting bitcoin officially was approved by the country's Congress.
Bitcoin: Countries That Does NOT Accept It
Despite bitcoin's popularity across the globe, there are some countries that are wary of it due to its volatility, its decentralized nature, perceived threat to current currency systems, and its connection to illicit activities like drug trafficking and money laundering. Others have tried to cut off financial and banking support for digital currency, while some have outright banned it.
It is essentially illegal to use bitcoin in China. Transactions or dealings in bitcoin are not permitted by any bank or financial institution, including payment processors. Exchanging cryptocurrencies is prohibited. Mining is banned.
Though it is illegal to use Bitcoin in Russia as payment for goods and services, the currency is not regulated.
Despite the fact that bitcoin is not regulated as a form of investment in Vietnam, its state bank maintains that bitcoin is not a legitimate form of payment.
Bolivia, Columbia, and Ecuador
Bitcoin and other cryptocurrencies are prohibited by the Central Bank of Bolivia. Bitcoin is not used or invested in by the Bolivian government. During Ecuador's national assembly, the majority voted to ban Bitcoin and other cryptocurrencies.
A public statement from the exchange office on 20 November 2017 stated:
"The Office des Changes wishes to inform the general public that the transactions via virtual currencies constitute an infringement of the exchange regulations, liable to penalties and fines provided for by [existing laws] in force."
A statement issued by the Monetary Authority of Morocco (AMMC), Bank Al-Maghrib, and Ministry of Economy and Finance warned against risks associated with bitcoin, which could be misused "for illicit or criminal purposes, including money laundering and terrorist financing".
According to Abdellatif Jouahri, governor of Bank Al-Maghrib, bitcoin is not a currency but a financial asset. In addition, he called for the establishment of a framework for protecting consumers against its dangers.
The Egyptian religious authority Dar al-Ifta, which is the primary Islamic legislative body in Egypt, issued a religious decree defining bitcoin transactions as haram (prohibited under Islamic law).
In India, cryptocurrencies are facing increasing hostility. The Indian government announced on November 23 that it plans to introduce the Indian parliament a bill to establish a new currency backed by a central bank while banning nearly all cryptocurrencies.
There was some discussion earlier this year about criminalizing crypto assets, including those which are owned, issued, mined, traded, and transferred. The prime minister told reporters that he does not want crypto to end up in the wrong hands, which could ruin our youth.
The majority of countries still lack explicit regulations, restrictions, or bans of cryptocurrency, despite bitcoin being over ten years old. Bitcoin's anonymous and decentralized nature has presented a challenge to many governments in balancing legal and illegal use. Many governments are studying regulatory measures to regulate cryptocurrency. Bitcoin is still largely considered a gray area in most of the world.