Course 3.6: Legal & Regulatory Considerations for Crypto Investors

Introduction

Welcome to the next part in our series; teaching you everything you need to know to build a diversified crypto portfolio. So far, you’ve learned the advantages of diversification and how to assess crypto assets to invest in. We’ve also covered how to continually and strategically manage your assets to ensure they remain profitable. 

However, you can’t safely begin investing in crypto without having a strong grasp of how to remain compliant with the necessary crypto regulations.

In this lesson:

• we’ll give you comprehensive, beginner-friendly explanations
• Cover crypto taxes and differing regulations to follow 
• And how to apply them to your portfolio planning. 

You’ll also discover how to practice responsible trading and best support the growth of diversified assets. With this knowledge, you can protect your crypto returns without worry of incurring fines (or worse) by inadvertently breaking regulations.

Taxes and Crypto

When you invest in cryptocurrency and receive a profit, you’ve technically created a new source of income. It’s similar to buying and renting out an investment property - while it’s not your job, it is a kind of revenue stream you are capitalizing on. Tax authorities see your cryptocurrency and other digital assets, like NFTs and stablecoins in this light; as potentially taxable assets. 

Is my crypto taxable? 

Many crypto assets are subject to their unique tax regulations. However, you can first generally consider if your investments are providing a gain or loss (or neither). If you’re only holding crypto, there’s no immediate gain or loss - and tax is only incurred once you sell that asset and ‘realize’ the gains (or losses). 

If you have sold your crypto and realized either a net gain or loss, you’re then subject to tax implications. In the U.S., if you held the crypto for longer than a year, it most likely is subject to capital gains tax (which have a lower rate). You must report your crypto gains or losses on your tax returns to the IRS. Diversified portfolios are also subject to more complicated taxes, as you may hold certain cryptocurrencies longer than others, or realize differing gains on each asset.

Are crypto tax laws the same in every country?

Tax rates and regulations will vary depending on what country or state you’re in, so be sure to check the specifics for your area. If you’re in Europe, you need to pay tax on your digital assets. However, tax rates are extremely varied depending on what country you’re in. Portugal has a 28% short-term capital gains tax, while Bulgaria’s is 10%. Before you file your taxes, make sure to check tax rates, as they’re always changing.

Crypto on the Rise, Governments Take Notice

Cryptocurrencies are getting more popular, and governments are looking at ways to regulate them. These rules are meant to keep people safe from scams and other crimes. It's a balancing act for governments: protecting citizens while also allowing innovation in the crypto space.

Strict vs. Progressive Approaches

Some countries take a tough stance on crypto. China, for example, banned crypto businesses and mining in 2021. South Korea lets people trade crypto, but exchanges need to register and private coins are banned.

Other countries, like Canada, the US, Japan, and Australia, see crypto as a legitimate form of money, investment, or property. This means you might have to pay taxes on your crypto gains in these places.

Navigating the Rules

Regulations can involve crypto companies getting licenses or reporting their activities. This might include collecting customer information to prevent money laundering or terrorism financing.

The Middle Ground

India, for instance, hasn't legalized or banned crypto. They tax it like property but haven't made any specific rules yet.

Regulations Impact Your Investments

Crypto projects that follow their home country's rules tend to be more stable. New cryptocurrencies, or those entering new markets, might experience price swings as they adapt to comply with regulations. Rules can also affect which cryptos you can buy and sell, making things more complicated.

Privacy and Responsible Trading 

Privacy is a major attraction for crypto investors, but it’s also a crucial element to consider in your trading strategy. Maintaining your privacy is akin to protecting the security of your crypto, reducing risk of calculated cyberattacks on your high-value portfolio. By nature, blockchain technology prioritizes privacy in transactions. 

Without a third party overseeing your transactions, you can ensure all crypto funds are sent directly to and from peers. This means improved autonomy and control over your finances and lower risk of cyberattacks. If you’re planning to invest in a high-value portfolio, it’s best to follow personal privacy practices too. This includes:

• Not tying your cryptocurrency accounts, usernames or digital wallet public key with your personally identifying information - such as by using your personal social media profiles to discuss your crypto portfolio.
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• Not letting anyone (besides trusted financial professionals) know the details of your crypto investments, such as how much value they’ve gained. 
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• Never sharing passwords, or allowing other people (besides reputable custodians) access to your digital wallet(s).
  
  
• Conducting thorough research and verifying the history of any new crypto investments.
  
  
• Maintaining diversification and spreading your funds across multiple asset classes.
  
  
• Only use secure, official platforms and websites to research, trade or invest in crypto.

You can increase your privacy by investing in privacy coins. These crypto coins are completely focused on user privacy, employing advanced technology and cryptographic techniques to protect their users’ information. Unlike many other crypto blockchains, which act as a public ledger displaying all transactions, privacy coins promise total anonymity. Other blockchains display digital wallet’s public keys on their transaction history - so if your identity is tied to that number, your funds are trackable.

Privacy coins Zcash (ZEC) and Monero (XMR) can offer features like stealth addresses, which are generated each time a user makes a transaction. Another feature is Zero-Knowledge Succinct Non-Interactive Argument of Knowledge (zk-SNARKs), a technology that can safely approve a transaction without verifying the user’s details. 

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Privacy coins have multiple use cases, making them an attractive investment vehicle even compared to other popular cryptocurrencies. One is fungibility, ensuring the integrity and uniqueness of individual assets while not compromising their confidentiality. Another is censorship-resistant payments, so users can bypass the restrictions of centralized authorities which might impose on user freedoms.

Conclusion

Successfully and safely navigating the complex crypto world while building your diversified portfolio requires a strong understanding of the regulations, laws, and tax requirements to follow. While this guide provides a comprehensive overview of these factors, always remember to conduct thorough, current research specific to your region so you can remain compliant. 

Armed with this knowledge, you can invest confidently, protecting your privacy and profits. If you’re seeking to develop a high-value portfolio, consider employing the help of an expert financial advisor. This way, you can create a strategy that works best for your specific goals within the regulatory matrix of your region.