If someone were to sell bitcoins on localbitcoins.com in exchange for paypal my cash cards, which were then deposited into paypal. Is that legal as long as any taxable gains received in the transaction are paid? If the amount is under $500 per day and $4000 per month would there be any requirement to know the customer or comply with anti-money laundering laws?
Depends upon your local laws. If your country/state regulates such transactions or requests you to report such sell/buy transactions, you may want to comply if you want to make everything 'legal'.
What you do in your country might be illegal for me in my local jurisdiction and vice versa.