Cryptocurrency Defined

NOTE FROM AUTHOR: The University of Illinois Tax School has invited me to be the instructor of a webinar they are hosting on Cryptocurrency & Taxes on August 16. I wanted to provide some initial information on the different types of cryptocurrencies so we could spend more time during the webinar on how they work and on the tax implications of using or investing in crypto during the webinar. This is not a prerequisite but knowing this up front will help you to better understand the information presented in the webinar.

A question I often get asked is “What is Crypto”?

The term “Crypto” references cryptocurrencies or crypto assets that are digital representations of value. Cryptocurrencies are a subset of virtual currencies. Virtual currency can be defined as virtual, or online, money. Virtual currencies are issued by developers and used within a given virtual community. The European Banking Authority defines virtual currency as “a digital representation of value that is neither issued by a central bank or a public authority, nor necessarily attached to a fiat currency, but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically.”

The definition of virtual currency from the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of the Treasury is similar: “a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency.” In particular, virtual currency does not have legal tender status in any jurisdiction. This definition has become clouded since El Salvador adopted Bitcoin as legal tender for the country. The Internal Revenue Service (IRS) defines virtual currency as property, not as a currency. The AICPA defines cryptocurrencies as long-lived intangible assets.

The different types of virtual currencies

• Closed virtual currencies are used in a closed community, most commonly multiplayer online games. The currency is fictional and has no value outside the game. Game rules often prohibit players from buying and selling the currency outside of the game.
• Single flow virtual currencies are similar to coupons or rewards points. Common examples are frequent flyer miles with airlines. The single flow virtual currency can be purchased, or provided with a purchase, and can be used to purchase goods and services from a provider but cannot be purchased or exchanged on an open market.
• Convertible virtual currencies can be purchased and sold on exchanges and used to complete transactions with individuals, businesses, and governments. Bitcoin is the most well-known convertible virtual currency.
• A cryptocurrency is a digital currency using cryptography to secure transactions on the blockchain, and to control the creation of new currency units. Not all virtual currencies use cryptography, so cryptocurrencies are a subset of virtual currencies.

UPCOMING WEBINAR: Tax School will be hosting a webinar with Dr. Robert Minniti on Tuesday, August 16 from 9-11am CT. Learn more and register.

By Dr. Robert K. Minniti, DBA, CPA, CFE, Cr.FA, CVA, MAFF, CFF, CGMA, PI
President and Owner of Minniti CPA, LLC