Regulation, Taxes, and Legal Considerations in Crypto

Crypto Regulation: U.S. and Global Overview

In the U.S., crypto regulation is handled by multiple federal agencies, often with overlapping or conflicting interpretations. Here is who’s who when it comes to crypto regulation:

● SEC (Securities and Exchange Commission): Focuses on whether certain crypto assets qualify as securities.

● CFTC (Commodity Futures Trading Commission): Treats many cryptocurrencies as commodities and regulates derivatives trading.

● IRS (Internal Revenue Service): Views crypto as property and imposes capital gains taxes.

● FinCEN (Financial Crimes Enforcement Network): Requires exchanges and custodians to comply with anti-money laundering rules.

Unlike traditional asset classes, there is no single federal framework governing all aspects of crypto. Regulation varies depending on whether you’re holding, trading, staking, or developing crypto applications.

And while crypto is traded around the world, countries take very different approaches to how the technology is adopted and regulated. For example:

● El Salvador and Central African Republic have made Bitcoin legal tender.

● Europe has passed MiCA (Markets in Crypto-Assets Regulation) to standardize rules across EU states.

● China has banned most crypto activities.

● Singapore and the UAE are creating clear licensing regimes to attract crypto businesses.

Are Cryptocurrencies Securities?

One of the most debated topics is whether crypto tokens are securities under U.S. law. The SEC uses the Howey Test, a legal framework from a 1946 Supreme Court case, to determine if a transaction qualifies as an investment contract. Under this test, a token may be considered a security if:

1. Money is invested,
2. In a common enterprise,
3. With the expectation of profit,
4. Derived from the efforts of others.

The SEC has brought enforcement actions against several projects, arguing that their tokens were sold as unregistered securities. Ripple Labs, the company behind XRP, is a high-profile example. Most Initial Coin Offerings (ICOs) sold by organizations to the public are considered securities by the SEC. However, decentralized coins themselves, like BTC and ETH, are considered commodities by the CFTC and, therefore, do not need to be approved for trading by the SEC.

When it comes to regulated financial products, the SEC has approved trading for eleven Spot Bitcoin ETFs under the Securities Act of 1934 and the Investment Company Act of 1940.

If a digital asset is deemed a security, it must comply with strict disclosure and registration requirements. This has implications for exchanges, developers, and investors.

Tax Implications of Crypto Investing

In the U.S., the IRS treats cryptocurrency as property, not currency. This means most transactions are taxable events, like:

● Selling crypto for fiat: Realizes capital gains or losses.

● Trading one crypto for another: Taxable even if no fiat is involved.

● Using crypto to buy goods/services: Treated as a sale of property.

● Receiving crypto via staking, mining, or airdrops: Considered income at the time of receipt.

Capital gains are based on the cost basis (what you paid) and holding period:

● Short-term capital gains: For assets held less than one year; taxed at ordinary income rates.

● Long-term capital gains: For assets held longer than a year; taxed at reduced rates (0%, 15%, or 20% depending on income).

Staking rewards and airdrops are taxed as ordinary income when received. If you later sell that crypto, you’ll also owe capital gains on any increase in value.

Recordkeeping and Tax Reporting

Depending on how you transfer and store your crypto holdings, you may need to be responsible for tracking your own transactions. Best practices include:

● Keep records of all trades, transfers, and income events.

● Track cost basis and holding periods using tools like CoinTracker, Koinly, or TaxBit.

When you use Webull Pay, you can expect 1099 forms to be sent to you prior to tax time.

One notable advantage is that the wash sale rule does not apply to crypto. In equities, selling a security at a loss and buying it back within 30 days disallows the deduction. In crypto, you can harvest losses more aggressively, but this could change if legislation updates.

Staying Compliant

To stay on the right side of the law:

● Report all taxable events on your tax return, including income and capital gains.

● Use reputable platforms with proper KYC and AML compliance.

● Avoid high-risk jurisdictions or unregistered investment opportunities.

● Monitor regulatory updates, as the rules are likely to evolve.

If you’re unsure about how a transaction is taxed, consult a CPA who understands digital assets.

Conclusion

Crypto regulation and taxation are complex and evolving. As an investor, staying informed and organized is essential. While the decentralized nature of crypto allows for self-custody and control, that also means you’re responsible for understanding the legal and tax implications.

In the next chapter, we’ll shift from compliance to strategy, with a look at how crypto trading works and how it differs from trading traditional stocks.