Most of your clients deal in dollars and cents, but you may have a few who have entered the virtual realm. They should be advised that their transactions in virtual currency have real tax consequences.<\/p>\n
What is Virtual Currency?<\/strong><\/p>\n Virtual currency is a digital representation of value that can function as a medium of exchange. Where it is accepted, virtual currency operates like \u201creal\u201d currency and can be used to pay for goods and services or held for investment. However, it does not have legal tender status in any jurisdictions.<\/p>\n Some virtual currency, such as Bitcoin, is \u201cconvertible.\u201d That is, it has an equivalent value in real money and can be purchased for or exchanged into U.S. dollars, Euros, or other real or virtual currencies. Other virtual currencies are \u201cclosed\u201d and have no connection to the real economy, such as currencies used in online games.<\/p>\n IRS Ground Rules<\/strong><\/p>\n The IRS has issued guidance on the tax treatment of transactions in virtual currency that is convertible into \u201creal\u201d money. For federal tax purposes, the IRS considers virtual currency to be property. Therefore, the general principles applicable to property transactions apply to transactions using virtual currency.<\/p>\n For U.S. tax purposes, transactions using virtual currency must be reported in U.S. dollars. Therefore, it is necessary to determine the fair market value of the virtual currency in U.S. dollars. If the virtual currency is listed on an exchange and the exchange rate is established by market supply and demand, the fair market value of the virtual currency is determined by converting the virtual currency into U.S. dollars (or into another real currency that can be converted into U.S. dollars) at the exchange rate, in a reasonable manner than is consistently applied.<\/p>\n A taxpayer\u2019s basis in virtual currency is generally the fair market value of the virtual currency in U.S. dollars as of the date of receipt.<\/p>\n