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Bitcoin Regulation: Is Bitcoin Legal in the United States?

May 3, 2022
6
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The Crypto industry is constantly changing, regulators are working to figure out what they want to do and how they’ll regulate Bitcoin and other crypto-related assets.

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As cryptocurrencies continue to make headlines, federal, state, and local officials are trying to decide how to regulate these digital assets. The result is still a churning mash that is influenced by the type of crypto, how it’s used, and where an organization or individual is based.

As a quick and broad answer, it's generally legal for individuals to own, buy, and sell Bitcoin throughout the United States—assuming it’s being used for legal purposes, of course. But taking a closer look at some of the cryptocurrency regulations reveals exceptions. The legality can also change as new laws are passed, posing a challenge to those considering investing in crypto.

What is Bitcoin—a currency, commodity, or security?

Deciding if Bitcoin is more like a dollar (currency), gold (commodity), or stock (security) is important for determining who and how different government agencies regulate a cryptocurrency. 

As it stands in early 2022, the U.S. Commodity Futures Trading Commission (CFTC) considers virtual currencies to be commodities, and the approach has been generally accepted. However, the CFTC doesn’t regulate the direct purchase or sale of Bitcoin. Instead, it focuses on derivatives, such as Bitcoin futures contracts. (Who regulates the cryptocurrency exchanges that allow people to buy and sell Bitcoin is a separate matter).

The Securities and Exchange Commission (SEC) has found that cryptocurrencies can be securities in some cases, which could give it regulatory oversight. For example, this may apply when a new crypto is offered in an initial public offering or crowdfunding-like campaign, such as an initial coin offering. The SEC may also regulate Bitcoin-related investment funds, such as a Bitcoin exchange-traded fund (ETF). 

Taxes on crypto are also complex. For individual investors, the IRS considers cryptocurrencies as property for tax purposes. Investors may need to pay short- or long-term capital gains taxes on their profits, and any sale or swap of cryptos could be considered a taxable event.

Is it legal to buy and sell Bitcoins in every state? 

For individuals, buying and selling Bitcoin is legal in every U.S. state. However, because Bitcoin isn’t legal tender, people and companies don’t need to accept it as a form of payment. (In some states, legislators have introduced laws declaring crypto as legal tender. But they haven’t passed and may not be constitutional if they do.) 

Some businesses accept Bitcoin and Bitcoin holders may be able to get debit cards that are linked to their Bitcoin to make purchases. They can therefore “sell” their Bitcoin to buy products and services. However, the payment-processing services may exchange the Bitcoin for dollars during the transaction, which means the retailer is really accepting dollars. 

States do have laws that may either limit or promote the use of cryptos. These laws sometimes refer to cryptos as virtual currency, digitals assets, cryptoassets, or digital tokens instead of cryptocurrencies.

A few examples include: 

  • Ohio bans the purchase of alcohol with crypto.
  • Colorado plans to accept crypto as payment for state taxes and fees, although the funds will be converted into dollars before being deposited into the state’s accounts.
  • New York requires a special BitLicense for companies and certain individuals who transfer, sell, buy, hold, or issue virtual currencies. Individual investors who buy, sell, or mine Bitcoin don’t need a BitLicense, and neither do businesses that only use crypto for buying and selling products or services. 
  • Wyoming exempts companies that buy, sell, issue, or take custody of virtual currencies from licensing. Wyoming also exempts certain types of cryptos from state security laws

Overall, state laws are very much a work in progress. According to the National Conference of State Legislatures overview of cryptocurrency legislation, Puerto Rico and 37 states have pending crypto-related legislation in the 2022 session.

Is it legal to mine Bitcoin in every state? 

Mining Bitcoin is legal in every state, but some organizations and jurisdictions may place limits on mining Bitcoin. For example, the U.S. Marine Corps bans service members from using government-issued devices to mine cryptos. In this case, the ban may be related to security concerns, but Bitcoin mining regulations generally stem from concerns about energy usage.

Bitcoin uses a proof-of-work (PoW) mechanism that requires Bitcoin miners to use large amounts of electricity and computing power to solve complex math problems. Bitcoin miners help verify transactions and keep the Bitcoin network running, and they have a chance to win new Bitcoin in the process. However, the energy usage is only increasing as the remaining unmined supply of Bitcoin decreases and solving the math problems becomes more difficult. 

As of March 2022, New York State’s Environmental Conservation Committee is proposing a two-year moratorium on PoW mining for all types of crypto. 

Smaller jurisdictions have also had mining-related laws. For example, Plattsburgh, New York, had a moratorium on mining from March 2018 to February 2019. And in 2021, Missoula County, Montana, passed zoning regulations for crypto mining operations, along with a requirement for the operations to mitigate adverse impacts related to energy consumption, noise pollution, and disposing of electronic waste.

Bitcoin isn’t unique with its PoW approach, but there are other cryptos that use an alternative proof-of-stake (PoS) approach that requires much less energy. A few cryptos, such as Algorand, even make a point of offsetting their carbon footprint.

Bitcoin regulation across the world

Outside the U.S., the legality and regulations vary widely. In September 2021, El Salvador became the first country to officially declare Bitcoin legal tender—the government even gave everyone about $30 worth of Bitcoin to kick things off. On the other end of the spectrum, some countries ban Bitcoin and other cryptos altogether.

These regulations frequently change, but the Law Library of Congress released an update to its Regulation of Cryptocurrency Around the World report in November 2021. The report states that nine jurisdictions have absolute bans, and 42 have an implicit ban—an increase from eight and 15, respectively, in 2018.

The nine jurisdictions that have an absolute ban on cryptos are:

  • Algeria
  • Bangladesh
  • China
  • Egypt
  • Iraq
  • Morocco
  • Oman
  • Qatar
  • Tunisia

Beyond the absolute or implicit bans, the report also highlights jurisdictions that have specific tax, anti-money laundering (AML), and combating of financing of terrorism (CFT) laws related to cryptos. The report found that 103 countries have either tax or AML/CFT crypto laws, and most of those have both types of laws. This is an increase from 33 jurisdictions in 2018.

The bottom line

The crypto industry is constantly changing, and regulators are working hard to figure out what they want to do and how they’ll regulate Bitcoin and other crypto-related assets, platforms, and transactions. Within the U.S., buying and selling Bitcoin is legal in every state, and Bitcoin mining is almost always legal for individuals. Organizations can also legally buy, sell, trade, hold, and mine Bitcoin, but they may have to comply with additional local, state, or federal regulations.

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