Is Bitcoin Legal?

As of March 2024, Bitcoin was legal in the U.S., Japan, the U.K., and most other developed countries. But in emerging markets and other areas, its legal status has varied dramatically.

China heavily restricted bitcoin without actually criminalizing holding it in 2019 but has backed off somewhat, licensing certain exchanges to offer bitcoin and ether trading. India banned banks from dealing in bitcoin and left the overall legal status of cryptocurrencies unclear while debating a framework. So, generally speaking, it is necessary to look at cryptocurrency laws in specific countries by checking for updates at the respective regulatory body in the country you're investigating.

Even where bitcoin is legal, most of the laws that apply to other assets also apply. Tax law is where most people are likely to run into trouble. For tax purposes, Bitcoin is usually treated as property rather than currency. However, exceptions exist, such as El Salvador, the first country to recognize Bitcoin as legal tender in June 2021.

IRS Guidance for U.S. Taxpayers

In the U.S., the Internal Revenue Service (IRS) considers bitcoin and cryptocurrency property and has issued guidelines. In 2014, the agency issued IRS Notice 2014-21 to provide information on the tax treatment of virtual currencies. Virtual currency is the term that the IRS uses for cryptocurrency.

In 2020, the IRS added a question on the first page of Form 1040 requiring taxpayers to declare if they engaged in any virtual currency transactions. Since then, it has published additional guidance to clarify taxes and reporting activity in cryptocurrency.

Other Legal and Regulatory Issues

Bitcoin exists in a deregulated marketplace, so there is no centralized issuing authority. Bitcoin addresses do not require Social Security Numbers (SSNs) or other personal information like standard bank accounts in the U.S. That initially raised concerns about its uses in illegal activities.

Over the years, Bitcoin's pseudo-anonymity has led to many illicit uses. Drug traffickers were known to use it, with the best-known example being the Silk Road market. It was a section of the so-called dark web where users could buy illicit drugs. All transactions on the Silk Road used bitcoin, but the FBI eventually shut it down.

There are still several issues raging between developers, enthusiasts, and regulators in the U.S. Other countries or unions, like the European Union and Japan, have published and implemented regulations and frameworks.

Defining Bitcoin

The Bitcoin blockchain and its cryptocurrency bitcoin was introduced in 2009 by a person or organization using the alias Satoshi Nakamoto. Bitcoin was intended to be used as an alternative payment method, but there are no physical bitcoins that correspond with dollar bills or euro notes—they exist only digitally.

Blockchains are a type of distributed ledger that is used to keep track of bitcoins. The cryptocurrency can be given directly to or received from anyone with a wallet address via peer-to-peer transactions. Bitcoin also trades on various exchanges around the world, which is how its market value is established.

Bitcoin can generally be transferred anonymously from one country to another on various decentralized exchanges, but some exchanges are not allowed to conduct business in certain countries. Because of this, it is important to be aware of the laws where your Bitcoin transactions take place and understand that even in countries where it is legal, the exchange rate against government-backed currencies can be very volatile.

The Bottom Line

Bitcoin is legal in many countries, but some, like India, have banned cryptocurrency completely. As time passes, laws and regulations change, so it is possible for a country that has banned them to reverse its stance. With that in mind, it's important to check the current laws of the country where you plan on using bitcoin.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author does not own cryptocurrency.