Virtual currency is a new, untested, and unregulated asset. The Internal Revenue Service (IRS) defines “virtual currency” as a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. “Convertible virtual currency” is virtual currency that has an equivalent value in real currency, or acts as a substitute for real currency. For simplicity, this post will use the terms virtual currency and convertible virtual currency interchangeably. Virtual currency is held for investment, used to pay for goods and services, and traded through online exchanges. Bitcoins and Ripples are the most well-known types of virtual currency. Bitcoins and Ripples contain their own version of virtual currency and systems, including payment systems. A Bitcoin or Ripple is sent between two accounts, converted into other currency, or used to pay for goods and services. Both Ripples and Bitcoins are finite in number, with only a certain number existing. Virtual currency is volatile, with unpredictable swings in value.
A particular virtual currency’s long-term viability is questionable because virtual currency is far from “mainstream.” Few merchants accept virtual currency for payment. Virtual currency is unregulated and decentralized, meaning there is no bank or governmental oversight. Taxpayers, however, might have to report virtual currency held in foreign exchanges to the IRS. Although the accounts currently are not subject to Report of Foreign Bank and Financial Accounts (FBAR) requirements, commentators opine that, in the future, virtual currency accounts could be subject to FBAR and the foreign exchanges could be subject to reporting under the Foreign Account Tax Compliance Act. Virtual currency is subject to higher scrutiny by law enforcement agencies due to perceived abuses. In law enforcement’s view, because virtual currency transactions are largely anonymous, opportunities exist for money laundering and tax evasion. Continue Reading