Internet Law

Some Background On Legal Issues Surrounding Bitcoin And Other Cryptocurrencies

Cryptocurrencies are forms of money with no physical presence. Accepting cryptocurrencies as payment for your business comes with many legal issues. Not all of these issues are answered yet, but cryptocurrencies are still becoming more and more common. As such, Heitner Legal can help you navigate through the complex realm of crypto-currencies.

Bitcoin is the most popular cryptocurrency today. Many issues arise because of the tendency of cryptocurrencies to fluctuate in value very rapidly. Purchasing something with Bitcoin or another cryptocurrency is like “buying something with shares of a volatile stock that you own – while it could be valuable, tomorrow it could be worth half as much, or even double.”

Bitcoins are stored in “digital wallets,” which are not insured by the FDIC. Therefore, any Bitcoins in your digital wallet are not truly protected. In real terms, any Bitcoins in your digital wallet are not insured by the United States government against that digital wallet company going out-of-business. Bitcoin transactions are anonymous in the sense that each transaction is tied to the “digital wallet ID,” rather than the user’s actual name and identity. Not having actual names tied to the transaction is primarily why marketplaces specializing in the sale of illegal products and services, like the “now defunct Silk Road,” accept Bitcoin as payment.

Bitcoin and other cryptocurrencies have a number of characteristics that make it different from traditional money. First, most major credit card companies will impose a transaction fee of around 3%, while Bitcoin allows individuals and merchants to transact directly with one another without a fee, thus lowering the overall cost of the transaction. Unlike the U.S. Dollar, Bitcoins can not be printed infinitely. The amount of Bitcoin that can be mined is capped at 21 million. A direct power of Congress under Article I of the U.S. Constitution is the authority “to coin Money” and “regulate the Value thereof” and thus may provide oversight and control of cryptocurrencies.

A notice issued by the Internal Revenue Service back on March 25, 2014 provided that virtual currency is treated as property for U.S. federal tax purposes. Cryptocurrenices apply the same general property transaction tax principles. Cryptocurrency wages are taxable to the employee, must be reported by the employer on a W-2 Form, and are subject to federal income tax withholding and payroll taxes. Payments to independent contractors with cryptocurrencies are also taxable and self-employment tax rules generally apply. Gain or loss from the sale or exchange of cryptocurrency depends on whether the virtual currency is a capital asset in the hands of the particular taxpayer. Finally, any payments made with virtual currency are subject to information reporting to the same extent as any other payment made in property.

The IRS also said, “[i]n general, you can receive income in the form of money, property, or services. If you receive more income from the virtual world than you spend, you may be required to report the gain as taxable income. IRS guidance also applies when you spend more in a virtual world than you receive, you generally cannot claim a loss on an income tax return.”

Under title 18 U.S.C. Sections 470-477 and 485-489, counterfeiting and forging of U.S. coins, currency, and obligations is subject to criminal sanctions, and under 18 U.S.C. Sections 478-483, counterfeiting foreign coins, currency, and obligations also subject to criminal sanctions. However, nothing expressly applies to a currency in digital form. At least one case involved a conviction for issuing and circulating “Liberty Dollars.” Liberty Dollars were similar but different in design from U.S. dollars and were intended to “limit reliance on, and to compete with, United States currency.” Whether the United States government can prosecute for use of cryptocurrency under one of the counterfeiting criminal statutes is quite unclear.

The Electronic Transfer Fund Act (ETFA), 15 U.S.C. Sections 1693, applies to transfers of money electronically, but is limited and does not appear to be applicable to a digital currency without a financial institution involved. The Act applies to transfers of funds initiated by electronic means from a consumer’s account held at a financial institution. Since cryptocurrencies use a peer-to-peer network, thus eliminating the need for a financial institution, this section is unlikely to apply.


The Stamps Payments Act criminalizes the issuance, circulation, or pay out of “any note, check, memorandum, token or other obligation, for a less sum than $1, intended to circulate as money or to be received or used in lieu of lawful money of the United States.” The language seems to apply to tangible forms of currency rather than cryptocurrency, but if Bitcoin or another cryptocurrency were to become a legitimate competitor of the U.S. Dollar, this statute might apply.

Engaging in financial transactions that involve proceeds of illegal or terrorist activities (or designed to finance such activities) is prohibited under federal criminal anti-money laundering laws. The Bank Secrecy Act (BSA) imposes record-keeping requirements on financial institutions to fight these illegal and terrorist-related financial transactions. All “money services businesses” (MSBs) must implement anti-money laundering programs to identify and stop such crimes, and MSBs must also file reports of cash transactions exceeding $1,000.

Currency dealer or exchanger, check casher, issue of traveler’s checks, money orders, or stored value, seller or redeemer of traveler’s checks, money orders or stored value, money transmitter, and U.S. Postal Service all fall under the umbrella of MSBs. Businesses and individuals that change Bitcoin into U.S. Dollars, or other foreign currency, must register with the Department of Treasury and comply with BSA reporting requirements.

In August 2013, the U.S. District Court for the Eastern District of Texas held that it had subject matter jurisdiction over possible fraud in investments purchased with Bitcoin, based on the court’s finding that investments purchased with Bitcoin are securities. This ruling may subject all investments purchased with Bitcoin to SEC regulations.

“Unfair or deceptive acts or practices in or affecting commerce” are prohibited by the Federal Trade Commission (FTC) Act. This act applies to cryptocurrencies. On September 15 2014 the FTC brought a civil action under the FTC Act against a company called Butterfly Lab in the U.S. District Court for the Western District of Missouri and charged the company with engaging in deceptive practices in violation of Section 5(a) of the FTC Act. The complaint alleged that Butterfly misled consumers who prepaid for Bitcoin mining machines and that these upfront payments amounted to thousands of dollars. The result of this case was that consumers could not produce Bitcoins, Butterfly was unjustly enriched, and the court had to intervene to stop a continuing substantial injury to consumers.