Is Cryptocurrency High Risk?

Cryptocurrency has become more popular in recent years. However, the problems and risks of cryptocurrencies are numerous. Potential investors need to understand the risks of cryptocurrency before investing. Read more about the dangers of cryptocurrency.

Taxes on Cryptocurrency

The way the government views cryptocurrency holdings is changing. The Internal Revenue Service (IRS) defines crypto as property, not a currency. This stance means when you report your cryptocurrency profits and expenses in your tax return, you’ll be subject to capital gains tax laws, regardless of where you purchased the digital coins.

If your cryptocurrency is held in a foreign account, it’s best to file a Statement of Specified Foreign Financial Assets — IRS Form 8938 — and a Foreign Bank Account Report (FBAR). The IRS doesn’t have a definitive ruling about reporting crypto foreign holdings so filing these forms protects you legally.

Is Cryptocurrency Legal?

Cryptocurrency is legal in the United States. However, since cryptocurrency is a new currency and payment system, few laws and regulations exist for it.

Purchasing and holding crypto assets incurs some risk. Financial institutions need to protect themselves against fraud and money laundering activities. Even if investors don’t commit these acts, they could become victims of these crimes. Crypto fraud victims don’t have the same legal protections as traditional fraud victims since crypto is decentralized.

Cryptocurrency Status and Registration

Cryptocurrencies are decentralized — they don’t have a physical presence and are not backed by a central authority. Cryptocurrencies are not attached to an institution or jurisdiction, making transaction or ownership issues complicated to solve.

Some businesses accept cryptocurrency as a form of payment. The vagueness of crypto’s legal status means businesses in the cryptocurrency market have vague operating parameters. Depending on their jurisdiction, some businesses will not need to complete registration and licensing while others may have to.

Spread Bets and Contracts for Difference (CFDs)

Cryptocurrencies can be traded using spread bets or CFDs. These trades bring different risks compared to buying the crypto outright. With spread betting and CFD trading, you deposit a percentage of the trade’s value to open a position, yet profits and losses are based on the trade’s full value. Cryptocurrencies can be volatile, and trading on margin can create significant losses.

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