June 14, 2021
Crypto Investments: Why You Need a Professional Attorney
Bitcoin, Peloton, Tesla, GameStop. COVID has put extra money in our pockets and too much time on our hands. If you haven’t been living under the proverbial rock, you have heard of cryptocurrency, albeit not fully understanding it. And therein lies the problem if you have jumped into the investment arena.
Consider that there are now about 10,000 different cryptocurrencies that are traded publicly, about 9,990 of which you probably have never heard of, with a total value of over $1.7 trillion as of this writing. Consider cryptocurrency values were at $2.2 trillion just one month ago. That’s a loss in value of $500 billion in just one month. Bitcoin alone has been valued at approximately $735 billion. So who determines what the value of a digital currency is? And what are the risks involved in investing in one?
What Makes Cryptocurrency Such a Draw?
While most physical currency is generated by a central bank, cryptocurrency generation is regulated by encryption techniques. Transactions are uniformly followed and verified through blockchain technology. It results in a secure transfer of funds that are controlled by the blockchain network. Because it isn’t managed by a central bank, the theory is that cryptocurrency hedges against inflation. Many see it as the currency of the future.
But how does this warrant its market value and the volatility it has seen in the marketplace? A currency is not an income-generating tool. The only way you make income from a currency is if someone is willing to pay more for it than you did. And this is when extreme speculation has come into play. For many, bitcoin has been a vast game of chance for the risk-averse until the risks or the law catch up.
The Legal Implications of Crypto
In the United States, the IRS will have great interest in your crypto transactions. Have you claimed the profits you made in your crypto investments? In other words, you may be getting yourself into hot water with the IRS without even realizing it. In addition, cryptocurrency in the U.S. is not considered currency but assets. Consequently, if you have had profits and expenses in cryptocurrency, you may be subject to capital gains, regardless of where the currency came from.
Those who purchased currency on foreign exchanges may also be subject to filing a Report of Foreign Bank and Financial Accounts with the Treasury Department.
Other Potential Risks to Consider
The tax implications of crypto notwithstanding, there are also some other significant potential risks to crypto investing:
- Cryptocurrency is stored in a digital wallet controlled by a public and private key. If the private key is lost or compromised, access to the currency may be lost or the funds stolen by a third party.
- The trading platform or other third-party providers may be vulnerable to hacking or other malicious activity. What is deemed secure today needs to be constantly updated to keep ahead of hackers.
- Currencies that are traded online, by third parties, or peer-to-peer have no intermediary services or protections and can be inherently risky.
- Crypto trading platforms are largely unregulated with little transparency and have come under ever-increasing scrutiny for fraud, business failure, and breach of security. In these cases, investors have been left holding the bag with no recourse.
- Digital assets are subject to a lot of uncertainty. Because their value is driven by the market with speculators driving the bus, there may be an eventual loss of confidence and an abrupt drop in value.
- Regulations and restrictions on cryptocurrency may be imposed by countries if it becomes evident that it is being used by criminal organizations.
- Prices fluctuate constantly. Per bitflyer.com: “There is a possibility that trades cannot be settled, may be difficult to settle, or can be traded only at significantly adverse prices depending on the market situation and/or market volume.” and “Please note that there is a possibility that the price of cryptocurrency could drop to zero.”
- There is great uncertainty in how crypto investment will be taxed and can differ from jurisdiction to jurisdiction
- Network slowdowns can occur due to the volume of transactions
- Dissent between users may cause the currency to fork into different networks, each trading differently.
Getting Legal Advice Regarding Crypto Investment
The risks of investing in cryptocurrency are varied, and regulations are still developing.There are existing tax rules and legal requirements that investors should fully understand before risking a great deal of hard-earned money into crypto. To best avoid pitfalls and protect your finances, you should speak with an attorney who has a great deal of knowledge about the ever-evolving world of digital currency investment. Contact Bukh Global to discuss the potential consequences of crypto investment and how you can keep on the right side of the law when you invest.