The IRS’ take on Cryptocurrency, or as the Service calls it, "Virtual Currency" is becoming more and more essential to investing and holding the assets. Why? Virtual currency transactions are taxable by law just like transactions in any other property. Taxpayers transacting in virtual currency may have to report thosetransactions on their tax returns. WHAT IS VIRTUAL CURRENCY? Virtual currency is a digital representation of value thatfunctions as a medium of exchange, a unit of account, and/or a store of value. In some environments, it operateslike “real” currency (i.e., the coin and paper money of the United States or of any other country that is designated aslegal tender, circulates, and is customarily used and accepted as a medium of exchange in the country ofissuance), but it does not have legal tender status in the U.S. Cryptocurrency is a type of virtual currency thatutilizes cryptography to validate and secure transactions that are digitally recorded on a distributed ledger, such asa blockchain.Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, isreferred to as “convertible” virtual currency. Bitcoin is one example of a convertible virtual currency. Bitcoin can bedigitally traded between users and can be purchased for, or exchanged into, U.S. dollars, Euros, and other assets.
