With cryptocurrency comes risks, rewards | Legal Affairs

The rise of cryptocurrency has led to many exciting investment and financial opportunities across the world. However, as with any new technology, this has left many people with many questions:

What is cryptocurrency? Cryptocurrency is a digital or virtual asset that is secured by cryptography. This makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are created and maintained using blockchain technology – a distributed ledger enforced by a network of computers.

Who is using cryptocurrency? People in first world countries, or countries with stable economies, tend to use cryptocurrency as investments. However, the majority of people using cryptocurrencies reside in countries with emerging or unstable economies. These users rely on cryptocurrency as an alternative to fiat currencies to preserve their finances when the local fiat currency is unstable or to circumvent restrictions when their country has rules about how much money can leave the country.

Is cryptocurrency legal? Yes, in the United States, cryptocurrency is legal. However, the U.S. government is still adopting rules and regulations for cryptocurrency markets. Currently, regulatory agencies are trying to define and regulate cryptocurrency within existing frameworks, which has led to inconsistencies and confusions. For example, the Commodity Futures Trading Commission considers cryptocurrency a commodity, while the IRS considers cryptocurrency as property. Similarly, the Securities and Exchange Commission sometimes considers cryptocurrency a currency, but sometimes considers it a security. To remove the regulatory confusion around cryptocurrency, on March 9, President Joe Biden signed an executive order calling upon these federal agencies to take a unified approach to develop policy recommendations to formally regulate cryptocurrency.

What are the risks of cryptocurrency? Beyond the fact that cryptocurrency is a volatile investment, which inherently comes with financial risks, people who want to invest in cryptocurrency should be wary of fraud. Tech-savvy criminals have defrauded many would-be cryptocurrency investors of billions or dollars over the past several years with fake cryptocurrency offerings and Ponzi schemes disguised as too good to be true investment opportunities. The best way to avoid these scams is to research cryptocurrencies before investing in them; recognize that if something sounds too good to be true, it probably is; and trade on regulated centralized trading platforms, such as Coinbase.

Is cryptocurrency taxable? Yes, cryptocurrency is considered digital property. Generally, the IRS treats it like stocks, bonds and other capital assets. Like these assets, the money you gain from cryptocurrency is taxed differently depending on how it was obtained and how long it was held.

Cryptocurrency is an exciting new technology and investment opportunity. While this newness comes with risks and uncertainty, people should not be dissuaded from learning about and using cryptocurrency. Cryptocurrency will only continue to grow.

Attorney Ian Friedman is founding partner of Friedman & Nemecek, L.L.C. in Cleveland and Mara Hirz is an attorney with the firm.

Content provided by advertising partner