Virtual Currency

Virtual currency is a regulatory and legal term for digital representations of value not issued by a government. FinCEN applied it to bitcoin in guidance issued in March 2013, and the IRS used it in Notice 2014-21, which classified virtual currency as property, not currency, for US tax purposes.

Why it matters

Legal labels carry consequences. The 2013 FinCEN guidance pulled exchangers of virtual currency into money transmission regulation, creating the licensing regime US exchanges operate under. The property classification means every disposal of bitcoin, including buying a coffee, is technically a taxable event requiring gain or loss calculation, a friction that weighs on its use as everyday money.

The term itself has drifted. Regulators increasingly say digital asset or convertible virtual currency, and virtual currency originally described tokens in games and online communities before bitcoin forced a broader definition.

In the gold vs bitcoin debate

Neither asset is treated as money by most modern tax codes. US law taxes physical gold as a collectible, with long-term gains rated up to 28 percent, while bitcoin is property with standard capital gains treatment. Advocates of each note the irony that the two assets with the longest and hardest monetary credentials are officially classified as something other than currency, while the label currency is reserved for government liabilities.