What is a Virtual Currency and How Does the Federal Government Treat It?

By: TSPadmin

When the computer was still in its infancy, virtual currency started out intending to distance itself from the Central Bank. The pioneer had a faulty architecture and rising legal impediments that led to its own demise.

Before its eventual demise, however, some individuals came up with their own similar concepts but never really gained the least bit of traction for them to shoot off into popularity. During this time e-gold was introduced into the digital world and it was very successful.

For a time, it had millions of users and transactions amounting to billions of dollars a year. But it was fraught with security inadequacies that made it susceptible to fraud and dubious schemes.  


On that same year, someone with a slightly altered construct with better security and anonymity came into the scene, Bitcoin. Not long after, several more began appearing after with Bitcoin at the top and the most popular, and probably the biggest of all the cryptocurrency.

A few of those that are similar to Bitcoin or that may have slight variations are Litecoin, Ripple, and Ethereum that came up one after the other. These are all essentially cryptocurrencies that use complex algorithms to encrypt the data they have within for digital means of exchange.

With the utilization of intricate and advanced mathematics and complicated engineering ideas, it is virtually an unbreakable system to locate, trace, forge, or copy the transactions or the users or even the currency itself. Nonetheless, this is still under the umbrella of virtual currency.

Other Virtual Currencies

With advanced applications in computing also comes an assortment of virtual currencies everyone seems to take no notice of. Take for example your debit or credit card which are basically digital form of your physical dollars or euros or francs.

Virtual currency is digital depiction of value that may be a means of exchange of goods and services. Some of these may be used as an alternate to the physical money or may even be converted into physical money.

Further, virtual currencies may also cross governmental borders and may also even be converted into other physical currency, from dollar to euro or the other way around since these are not issued by any central bank.

The Federal Stand

This type of currency – the virtual currency – is treated by the federal government or by the Internal Revenue Service (IRS) as an asset or, in its dressed down form, as property. 

As such, the general principles on taxation that are applicable on property transactions are also applied to property transactions that are using virtual currencies. Usually it is taxed for capital gains or capital losses but not just limited to these.
In other words, it is not only trading that will be taxed as there are other instances. For a more comprehensive understanding on taxation of virtual currencies, a knock on the door of FreeTaxUSA will be an enlightening episode. 

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