What Are the Risks of Cryptocurrency for Investors

19 May, 2022

7 min read

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Cryptocurrencies pose several risks and given that they serve as relatively new forms of payment, understanding what these are is important.

Given the current surge in interest in cryptocurrency, it is of paramount importance to acquire an understanding of the legal implications associated with this new form of currency as well as the technologies that power them. The nature, inherent meaning and consequences of digital currencies are currently being sought to be comprehended by central banks, tax authorities and regulatory agencies across the world. While you as an individual investor stand the potential to make gains by directing your money towards them by making cryptocurrency investments, it is important you recognise the fact that you assume a certain set of legal risks in the process of buying and selling cryptocurrencies.

It is worth noting that the uncertainty and murkiness that shrouds the legal understanding of cryptocurrency stems from its relatively new status in comparison to traditional forms of payment and currency.

Understanding the Relationship between Cryptocurrencies and Taxes

Indian Laws

One of the most pressing legal concerns for those that choose to invest in cryptocurrency pertains to the way the government tax authorities perceive these digital holdings. Since their views are constantly evolving, it is necessary for cryptocurrency investors to maintain tabs on the latest announcements. India’s 2022 Budget saw the country’s finance minister, Nirmala Sitharaman, provide a detailed report as to how cryptocurrency holdings would be taxed.

American Laws

Within the United States, the IRS has chosen to categorise cryptocurrencies as property rather than as currencies. This translates into individual investors being subject to capital gains tax laws when they have to report the profits and expenses they drew from their holdings in their annual tax returns. This holds true regardless of where they may have purchased their cryptocurrencies and applies to investors who buy and sell digital coins. If, however, an employee earns cryptocurrency as a salary their earnings will be taxable as income and the amount will depend upon the USD value of the cryptocurrency at the time at which it was paid.

It isn’t uncommon for cryptocurrency trading to involve traders holding the same in foreign accounts. In the United States, federal law doesn’t consider ownership of a foreign cryptocurrency account as an account that needs to be reported. What this means is that cryptocurrency account holders don’t need to file disclosures to the U.S Treasury Department.

Assessing the Decentralised Status of Cryptocurrencies

One of the primary reasons why investors gravitate towards digital currencies also happens to serve as a crypto risk for individual investors. Given that cryptocurrencies are inherently decentralised, they don’t take on a physical form and aren’t upheld by a central authority.

 Now, although governments across the globe have intervened in an attempt to impose regulatory power in a number of ways, Bitcoin as well as other digital currencies remain untethered to any institution or jurisdiction. While this may leave investors unbeholden to said institutions, it can also lead to legal complications.

Like all other currencies, the value that owners and investors assign to digital currencies entirely determines what they amount to. That being said, the absence of a central authority that upholds the value of a digital currency can potentially lead to investors being left in the lurch in the event that complications pertaining to ownership of transactions transpire.

Another one of the risks of cryptocurrency associated with them maintaining a decentralised status is related to the intricacies of transactions. While most other transactions involving currencies have a physical presence changing hands or - in the case of electronic transactions, a trusted financial institution serves as the medium responsible for creating and settling debt and deposit claims - they are each absent in the case of cryptocurrency transactions.

Owing to this primary difference, the potential for legal confusion arising between parties involved in varied kinds of digital currency transactions is high. To reiterate, since these currencies are decentralised, the legal recourse meant to be taken may be difficult to ascertain.

Registration and Licencing

As time has passed it has become apparent that a number of businesses have begun accepting digital currencies as a form of payment. For instance, stores in the United States ranging from the Xbox Store to Whole Foods each accept Bitcoin payments as of 2022.

Just like other financial areas, businesses may over time need to register and acquire licences in order to carry out these activities. That being said, owing to the complex and evolutionary nature of the laws surrounding them, this area relating to businesses operating within the cryptocurrency market is yet to acquire more clarity.

To understand this better consider the fact that companies that solely permit cryptocurrencies may not be required to register and obtain any licences whereas they may need to report them keeping in mind the jurisdiction within which they operate.

Business owners and managers are responsible for ensuring that they follow appropriate protocol and operate lawfully at the local, state and governmental levels.

Money Laundering and Fraud Concerns

A number of people are of the opinion that cryptocurrencies have opened up a new realm of opportunity to criminal organisations to dabble in money laundering and commit fraud among other financial crimes. While this may not impact the majority of cryptocurrency investors who don’t intend to partake in such crimes with the aid of this new technology, investors can still find themselves susceptible to being victims of said crimes. Their situation is particularly precarious as they may not have access to the same legal options that ordinary victims of fraud presently have. 

Wrapping Up

Understanding the risks that cryptocurrencies pose is important and must be thoroughly comprehended prior to purchasing them. While there does exist the potential to make a pretty penny via cryptocurrencies, you must proceed with caution. Learn more about digital currencies on the Angel One website today.

 

Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.

 

Angel One Limited does not endorse investment and trade in crypto currencies. This article is only for education and information purposes. Discuss with your investment advisor before making such risky calls.

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