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Investors: Don’t Fall for These Legal & Regulatory Myths

— October 27, 2022

While the law is complex and ambiguous, there’s a simple way to view the topic to avoid falling into many traps related to the practice.

It’s no secret that the investing world is jam-packed with laws, regulations, rules, guidelines, and ethical standards. Thinking about the must and must not rules can give the average person a headache. But it’s critical to understand all the legal standards and similar regulations to stay on the right side of the law. As with civil and criminal standards in all other categories, ignorance of a particular statute, law, or rule is not an excuse for falling short and would still make you liable for any applicable penalties.

While every professional must research on their own to understand the complex legal environment in which they operate, it’s wise to keep track of a few common myths and misconceptions floating around for a long time. Unfortunately, a few unlucky adults regularly fall into the trap of believing random bits of misinformation and urban legends, much to their detriment. By reviewing the shortlist of flawed myths, you can avoid being a victim of bad logic, misstatements, and any falsehoods.

Rental Real Estate Investing Offers Tax-Free Income

It’s a complicated investment that calls for research and planning, and there are tax obligations, as with most everything else. While rental property represents one of the better long-term investment opportunities for those in all income groups that you can take part in, all sorts of complexities can enter into the equation. For instance, once you take ownership of a property, you receive rental income regularly and have legal ownership of a valuable asset. Likewise, as an owner, your property can appreciate as time passes. 

All these factors mean you need to research and possibly get expert advice on reporting income, appreciation, and other financial changes associated with the unit. Anyone actively managing real estate properties must eventually decide whether to form a limited liability company. The move can be an effective way of not only minimizing the tax obligation on the property’s income and appreciation but also helping you organize dozens of other aspects of the business. Every prospective owner should review a comprehensive guide on LLCs and how they can make ownership more profitable and less complex.

It’s Illegal to Own Gold Bullion

Owning gold is 100% legal, but that was not always the case. Before 1972, it was illegal for US citizens to own gold bullion except in the form of rare coins. Then, all those restrictions were removed in one swoop, which opened the doors for unlimited private ownership of all forms of gold. However, as with any other asset that has value and can appreciate over time, gold comes with some tax reporting requirements for anyone who sells it for a gain or loss. There are also strict requirements about recording large transactions when buying or selling gold.

Stock Tips from Friends Can Be Profitable

If your friend works for the company in question, you could be guilty of insider trading, a severe crime. It’s essential to research the various legal definitions surrounding the process of insider trading. According to the SEC (Security and Exchange Commission) website,, it includes “buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, based on material, nonpublic information about the security.” Especially if you are using stocks to set up your retirement correctly, you need to research every angle to protect yourself and your money.

Stock market chart. Image via Pixabay via Wikimedia Commons. Public domain.

While the law is complex and ambiguous, there’s a simple way to view the topic to avoid falling into many traps related to the practice. For example, if a friend gives you a hot tip on a stock, be careful to find the source of information. If it originated with anyone who might possess proprietary information, then it’s usually safe to ignore the advice. Too often, otherwise innocent adults become ensnared in criminal cases by unwittingly purchasing securities based on informal information that they think is just someone’s educated guess about how the market will behave. When searching for investment advice, stick with reputable websites and brokerage firms. Play it safe by not acting on any tips from acquaintances, no matter how good they appear.

There Are No Tax-Free Investments

There are several low-tax and tax-free ways to invest. The good news is that there are several safe ways to earn tax-free or nearly tax-free income. While everyone’s situation is unique, most investors are relatively safe from the clutches of the tax authorities when they purchase assets like municipal bonds, college savings plans under the 529 designations, tax-exempt MFs (mutual funds), health savings accounts, tax-exempt ETFs (exchange traded funds), Roth 401(k)s, universal life insurance policies that are indexed, and Roth IRAs. There are more, but those are the ones that attract the vast majority of investor capital. Note that various rules and conditions apply to most no-tax asset classes, so check with your accounting professional before purchasing.

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