Legal Crypto In United States

Legality of Cryptocurrency

General Legal Status

The United States has legalized the use, purchase, and holding of cryptocurrency, such as Bitcoin, throughout the country. The regulatory scheme is complex and there is no single, uniform federal statute that pertains exclusively to cryptocurrencies, but is made up of both federal and state laws. This piecemeal approach leaves users and companies in a regulatory thicket.

Title to the Company Common Stock

The IRS treats cryptocurrencies as property for tax purposes, a stance the agency took in IRS Notice 2014-21. Under this definition, anyone using digital assets, such as trading, spending, or swapping cryptocurrencies and non-fungible tokens (NFTs), must report such transactions and pay capital gains or losses. The crypto markets are so volatile that even small transactions can lead to massive tax liabilities, which require meticulous keeping of records to play by the IRS’s rules.

Implications for Users

Cryptocurrency tax treatment is very burdensome for users. You have the full obligation of your trading activities (including reporting, payment of taxes). The swap of one cryptocurrency for another, for instance, is a taxable event that could theoretically involve you in capital gains tax based on the asset’s gains. This complexity has resulted in a surge in the use of crypto tax software and professionals who provide accounting services to ensure compliance.

Federal Regulatory Framework

Overview of Federal Oversight

Congress can't manage it: There are a whole bunch of federal regulators that cover various parts of the cryptocurrency market, each with a specific mission to make sure our financial system remains safe, investors are taken care of, and the existing laws are enforced. This multi-agency perspective is echoed by the fact that cryptocurrencies are multi-faceted instruments, ranging from security-like, commodities-like, or security uses and of mediums of exchange themselves.

U.S. Securities and Exchange Commission (SEC)

The SEC regulates cryptocurrencies that meet the requirements of securities based on the Howey Test, which involves the investment of money in a common enterprise with an expectation of profits from the efforts of others. The SEC is focused on initial coin offerings (ICOs) and token offerings, with the goal of protecting investors from fraud, investing in unregistered securities, and market manipulation. The SEC’s aggressive posture against unregistered offerings is reflected in its high-profile enforcement actions against projects such as Ripple and Telegram.

Commodity Futures Trading Commission (CFTC)

The Commodity Futures Trading Commission (CFTC) has previously determined that some cryptocurrencies such as Bitcoin and Ethereum are commodities under the Commodity Exchange Act. The CFTC has the authority to regulate derivative markets, such as crypto futures and options, to ensure the markets are transparent and that no one can manipulate the prices of the futures, options, and swaps. Its authority encompasses exchanges that provide leveraged trading products, which must be registered with the CFTC to operate legally.

Internal Revenue Service (IRS)

The IRS also pinpoints tax obligations arising out of cryptocurrency transactions and several data must be reflected for capital gain/loss calculation in Form 8949. Aside from trading, other activities like mining, staking, receiving payments through cryptocurrencies in exchange for goods or services are also subject to tax. State authorities, meanwhile, have stepped up, collaborating with blockchain analytics companies to go after unreported transactions, as well as issuing John Doe summonses to exchanges in order to obtain user data.

Financial Crimes Enforcement Network (FinCEN)

The Bank Secrecy Act (BSA), administered by FinCEN, is the statute that gives the regulatory power for AML/KYC rules. Crypto exchanges and custodial services providers will need to be registered as MSBs and develop and maintain AML programs; they will also be required to report suspicious transactions in an effort to stem nefarious activities, such as money laundering and terrorist financing. Under FinCEN’s draft rules, many of those requirements could be applied to non-custodial wallets, with implications for privacy and decentralization.

Office of Foreign Asset Control (OFAC)

The U.S. Office of Foreign Assets Control (OFAC) tracks crypto payments to enforce American sanctions, blacklisting wallet addresses associated with banned parties or regions. For example, OFAC has designated addresses linked to ransomware groups and bad state actors, forcing exchanges to impose a payment blockage on transactions dealing with these addresses. That adds a level of compliance for platforms that touch international crypto flows.

Pending Federal Legislation

There have been a number of bills proposed that would help provide clearer regulation in regard to cryptocurrency. The CLARITY Act aims to clarify SEC and CFTC authorities, create a federal licensing system, and include regulatory carve-outs for stablecoins and decentralized finance (DeFi). The GENIUS Act addresses stablecoin issuers by requiring reserve requirements and federal/state oversight to mitigate risk. The Financial Innovation and Technology for the 21st Century Act (FIT21) sets out a thorough framework for digital assets including classification and taxation, and consumer protections. The bills, which are still under consideration, reflect a move toward a more unified regulatory system, but their passage is uncertain.

State-Level Regulations

Diversity in State Approaches

State regulations are all over the place, which leads to a patchwork of compliance requirements that can be a nightmare for crypto businesses that operate across jurisdictions. States have taken different paths, from strict licensing schemes to blockchain-friendly agendas that reflect local sensibilities and economic imperatives.

New York’s BitLicense

New York’s 23 NYCRR Part 200 BitLicense, which falls under the Department of Financial Service’s purview, is one of the strictest state programs in existence. Under the law, crypto businesses must be licensed, maintain cybersecurity standards, and hold capital reserves, in addition to adopting measures for protecting consumers. The BitLicense is known for its steep compliance costs which have prompted some companies to steer clear of New York.

Blockchain Friendly Laws of the State of Wyoming

Wyoming has become a poster child for blockchain advancement, passing legislation including SF 0125, which acknowledges DAOs as legal entities and makes some crypto transactions tax-exempt in the state. Wyoming also permits banks to provide crypto custodial services and has launched a regulatory sandbox to test blockchain applications, luring crypto companies to the state.

Other State Initiatives

California and Texas present standards of encouragement of blockchain while introducing consumer protection requirements that may range from mandatory disclosures for crypto platforms. Florida and Arizona have proposed allowing people to pay state taxes with the use of cryptocurrencies, while Colorado has adopted legislation that allows the blockchain to be used in recording public records. The moves are indicative of increasing state-level interest in tapping blockchain technology, but they also create another complication for businesses operating under overlapping regulatory schemes.

Decentralized Finance (DeFi)

Nature of DeFi Platforms

Decentralized finance (DeFi) apps, mainly developed on Ethereum and other smart-contract capable blockchains, allow users to access lending, borrowing, trading, and yield farming services directly from other peers – without the need for traditional intermediaries. They are operated through automated smart contracts, providing exposure and efficiency, but they have come under scrutiny from regulators because of their pseudonymous opacity.

Regulatory Challenges

The regulatory status of DeFi is “decentralized.” Most protocols are in “decentralization mode” and are not registered with either SEC or FinCEN. The SEC has taken enforcement actions against certain DeFi projects, arguing that some platforms market unregistered securities or are operating as unregistered exchanges. FinCEN is considering AML rules for DeFi, meaning crypto-protocols could have to use user-hostile KYC requirements. This could hurt DeFi’s decentralized premise. The CLARITY Act has exemptions for truly decentralized protocols but in practical terms, “decentralization” is a hard thing to pin down.

Systemic Risks and Growth

With billions of dollars in locked value, the rapid uptick in DeFi protocols presents systemic risks, such as smart contract fragility and liquidity risks. Hacks and exploits of high-profile targets have raised calls for better security methods. Regulators are also investigating DeFi’s role in enabling illicit transactions, but, because the space is public by nature through its use of blockchains, compliance possibilities exist especially through blockchain analytics.

Non-Fungible Tokens (NFTs)

Overview of NFTs

Non-fungible tokens (NFTs) are one-of-a-kind digital assets that are stored on a blockchain and can be anything from artwork, digital cities, and assets in virtual worlds to collectibles, music, and gaming items. These are legal to create, trade, and own in America, where platforms such as OpenSea, Rarible, and Blur hold sway. NFTs have democratized digital ownership but also face legal and regulatory challenges.

Taxation and SEC Oversight

The IRS treats NFTs as property and taxes sales or trades based on the capital gains tax, which means detailed record-keeping is necessary because of market movement. Some NFTs could be labeled as securities by the SEC, if they are sold as speculative investments or have fractional ownership — as with enforcement actions the regulator took against projects including Stoner Cats. This situation underscores the need for definitional clarity around NFTs.

Regulatory and Legal Issues

Regulators are concerned about consumer protection in NFT marketplaces and are grappling with issues such as wash trading, copyright violation, and fraud. The combination of NFTs with intellectual property law raises issues of ownership, licensing, and royalties, particularly for digital art and music. Impending regulations could force marketplaces to provide more transparency around risks, authenticity, and creator compensation.

Best Cryptocurrency Exchanges and How to Trade on Them

Overview of Exchange Methods

More lackluster returns may follow in the U.S. if the status quo is maintained; the largest exchanges – which are AML and KYC compliant – will continue to be the primary U.S. places to trade, including centralized exchanges (CEXs), like Coinbase and Kraken; decentralized exchanges (DEXs), such as Uniswap and SushiSwap for P2P trading; P2P platforms, such as LocalBitcoins and Paxful, where you trade directly with people; and crypto ATMs, which enable you to purchase crypto with KYC verification for contactless cash-to-crypto buying.

Key U.S. Exchanges

Below is a summary of key information from prominent U.S. cryptocurrency exchanges, allowing you to compare their services, compliance standards, offered assets, security, and fee schedules:

Exchange	Services Offered	User Base (Approx.)	Supported Assets	Security Features	Fee Structure
Coinbase	Trading, staking, custodial wallets	100M+ users	200+ (BTC, ETH, SOL, etc.)	2FA, cold storage, insurance	0.5%-4.5% per trade
Kraken	Spot trading, futures, margin trading	10M+ users	100+ (BTC, ETH, ADA, etc.)	2FA, encryption, offline reserves	0.1%-0.26% per trade
Binance.US	Trading, lending, low-fee transactions	5M+ users	150+ (BTC, BNB, XRP, etc.)	2FA, device management, SAFU fund	0.1%-0.75% per trade
FTX.US	Derivatives, spot trading, NFTs	2M+ users	50+ (BTC, ETH, NFTs, etc.)	2FA, biometric auth, audited reserves	0.02%-0.2% per trade

Useful Information: Important Laws and Regulations

Bank Secrecy Act (BSA): Crypto Exchanges are required to register at FinCEN, have Anti-Money Laundering (AML) programs, report suspicious transactions, in an effort to fight money laundering.

Securities Act of 1933: Regulates the SEC’s oversight of crypto tokens classified as securities and necessitates registration or exemptions for ICOs and token sales.

Commodity Exchange Act: Gives the CFTC authority over crypto derivatives, promoting transparency in the market and preventing manipulation in the futures and options markets.

IRS Notice 2014-21: Considers cryptocurrencies to be property, meaning that transactions would be subject to capital gains tax and the user must report it extensively on Form 8949.

New York BitLicense (23 NYCRR Part 200): Requires licensing for crypto businesses in the State of New York with requirements for cybersecurity, consumer protection, and financial reserves.

Wyoming Blockchain Legislation (e.g., SF 0125): Treats DAOs as a legal entity and exempts some forms of crypto trade from state taxation, promoting blockchain technology innovation.

Conclusion

The U.S. cryptocurrency market is regulated on multiple fronts, aiming to balance innovation with market integrity and investor protection. Cryptocurrencies, DeFi, and NFTs are regulated, even if there is no comprehensive, cavity-to-cavity regulatory system, they are regulated by the SEC, CFTC, IRS, and FinCEN on the federal level and by an assortment of state regulations. Proposed laws, such as the CLARITY Act, GENIUS Act, and FIT21, which are designed to clarify and make compliance easier, are out to address but without a national standard, difficulties and problems remain. Businesses and users are left to navigate a maze of tax liabilities, regulatory reporting requirements, and enforcement risks. Thanks to compliance-friendly infrastructure and banking partners, participants can now engage in the crypto ecosystem with increased confidence and legal certainty by following important laws and regulations such as the Bank Secrecy Act, Securities Act, and rules specific to each state.