"Virtual currency" is a form of currency or medium of exchange that is electronically created and stored. It is defined by the U.S. Department of Treasury as "a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency." While real paper money and coins are legal tender, virtual currency does not have the status as legal tender. Some other names for virtual currency are virtual money, digital money, and cryptocurrency.
While virtual currency is used to purchase virtual goods within a variety of online communities, virtual currency may also be used to purchase physical goods and services. Some common virtual currencies are Bitcoin, Peercoin, Ripple, and Litecoin.
When a person purchases virtual currency, the virtual currency may be used as cash to make purchases from one or more retailers (e.g., social networking websites, online gaming and merchandise websites). Although there may be some limitations on where and on what the virtual currency can be spent, the virtual currency can be spent or redeemed similar to cash and gift certificates.
The sales price from the sale of the virtual currency is not taxable because the virtual currency represents an intangible right. When virtual currency is redeemed for a taxable product, the transaction is completed and the retailer's sales or use tax liability accrues at that time. The tax is computed on the value of the consideration received by the seller, measured in U.S. dollars as of the date that the virtual currency is received.
Note: If the sale of virtual currency represents the sale of a specific identifiable product or service that is subject to tax (such as an admission to an amusement event, digital music, or other digital good), the sale is taxable as the sale of the specific identifiable product.
Additional information about virtual currency is available on the Internal Revenue Service's website at www.irs.gov/uac/Newsroom/IRS-Virtual-Currency-Guidance.
Page last updated March 28, 2014