SEC issues warning about bitcoin investments

The SEC is urging investors to proceed with caution when evaluating potential investments related to bitcoin.

Bitcoin-related investment opportunities may come with a heightened risk of fraud, the SEC warned in an investor alert issued Wednesday.

In the alert, the SEC said the rise of bitcoin and other virtual and digital currencies creates new concerns for investors. New products, technologies, or innovations such as bitcoin may give rise to frauds and high-risk investment opportunities, according to the SEC.

Investors may find it difficult to resist promises of high investment returns that fraudsters may make related to bitcoin, the SEC said. The SEC suggests that investors consider the following risks when evaluating investments involving bitcoin:

• Bitcoin is not insured. Bitcoins held in a digital wallet or bitcoin exchange do not have insurance protections.
• Bitcoin has a history of volatility. The exchange rate of a bitcoin has dropped more than 50% in a single day, the SEC said.
• Use may be restricted. Bitcoins are not legal tender, and federal, state, or local governments may restrict the use and exchange of bitcoins, the SEC said.
• Security is a concern. Fraud, technical glitches, hackers, or malware may cause bitcoin exchanges to stop operating or permanently shut down, the SEC said. And there is potential for hackers to steal bitcoins. The Mt. Gox bitcoin exchange in Japan recently collapsed after hackers apparently stole bitcoins worth millions of dollars from the exchange, the SEC said.
• Bitcoin lacks an established track record. Bitcoin is a recent invention without a long-term record of credibility and trust, the SEC said.

The SEC also warned investors of the following potential signs of investment fraud:

• “Guaranteed” high investment returns. A promise of a high rate of return with little risk should be treated warily, the SEC said.
• Unsolicited offers. A sales pitch that you didn’t request from a sender you don’t know may be a fraud scheme, the SEC warned.
• Unlicensed sellers. Investment professionals and their firms must be licensed or registered, the SEC said. Many fraudulent investment schemes involved unlicensed individuals and unregistered firms.
• No net worth or income requirements. Federal securities laws require securities offerings to be registered with the SEC unless an exemption from registration applies. Most registration exemptions require that investors are accredited investors. Unregistered investment opportunities offered by individuals who do not ask about your net worth or income should arouse suspicion, the SEC said.
• Sounds too good to be true.
• Pressure to buy immediately. Fraudsters may create a false sense of urgency.

The IRS is treating virtual currencies such as bitcoin as property for federal tax purposes, according to recently issued guidance. As a result, virtual currency is subject to the general tax principles that apply to property transactions.

—Ken Tysiac (ktysiac@aicpa.org) is a JofA senior editor.