Virtual currencies are a variety of cryptographically generated virtual currencies. The most famous of these currencies is Bitcoin. Not backed by a government, they are seen as less real than government issues fiat currency, and taxed differently by the United States government.
Used to bypass countries with restrictive capital controls, engage in illicit business, or simply preserving anonymity for people in cashless transactions, virtual currencies are an unusual and interesting area of the tax code.
Ethereum has joined Bitcoin as the best known cryptocurrencies that create a method of storing values. Cryptocurrency uses algorithms that ensure scarcity to create value, often paired with an anonymous blockchain ledger to provide a degree of anonymity for its users.
In contrast to cryptocurrencies, other virtual currencies are owned by a singular company. Various online games have their own currency system that often has a value in the real world. There are open markets to acquire the various credits on various games. Roblox has become the most famous cyberworld to have a substantially real world value for the creatives within the game system.
The important part of the currency is the ability to use it in trade for goods and services throughout the economy. Bitcoin has a liquid market, making transfer into traditional currency a viable solution. Depending on the level of liquidity within the market, different virtual currencies have a different role to play within an economic portfolio.
The IRS does not consider these to be foreign currencies, so they are treated similarly to a stock or other asset with capital gains being taxed accordingly. Any inclusion in your wealth portfolio should examine the risk, growth potential, and tax impact of trading these virtual currencies on an open market.
