What Are Virtual Currencies?

If you have been paying attention to the news lately, you have probably heard a lot about Bitcoin, one of the many virtual currencies that has been getting a lot of press. But what exactly are virtual currencies, and do currencies like Bitcoin have any real value? In a world where technology seems to evolve and change every day, how safe it is it to use virtual currency?

Here’s a brief overview of what you need to know–

What’s a Virtual Currency?

A virtual currency is exactly that – a type of currency that is virtual, or completely digital. The currency is controlled by its developers, and can be used by those who recognize it as a legitimate form of currency (typically those within a specific virtual community). They are also known as crypto-currencies, virtual money and/or digital cash. Currently, virtual currencies are not regulated by any state, federal, or international agency. Rather than being based in something real and material, Bitcoins are created by “mining,” which is the term for using computers to solve complex math problems.


What Is Bitcoin?

Bitcoin is a type of virtual currency, although it is surely not the only one – Litecoin, Ripple, Dogecoin, and Peercoin are just a handful of others. However, Bitcoin is one of the more popular digital currencies right now. Created in 2009, the price of Bitcoin has skyrocketed in 2017, and is currently an accepted currency at many online platforms, including Expedia, Overstock.com, and even Dish TV.


So Why Use Virtual Currencies?

Those who are in support of virtual currencies list a number of advantages including:

  • No middle men;
  • Easy transfers between individuals using mobile apps;
  • Easy to buy and sell bitcoins;
  • Stored virtually;
  • International payments are cheap (no fees, no regulations); and
  • Potential investment value.

However, Bitcoins are not without risks, including the fact that virtual wallets can be hacked and anything stolen will be very difficult to recover. What’s more, the stability and longevity of the Bitcoin and other virtual currencies are debated, with some experts predicting that Bitcoin is in a bubble that is going to crash. Their value is constantly fluctuating which may be too much of a risk for some people.


What does the United States Internal Revenue Service (IRS) Have to Say?

The IRS issued a notice in 2014 to provide answers to frequently asked questions regarding virtual currency. This basic information  provides the federal tax implications of transactions involving virtual currency. It goes on to state that it should be treated as property for federal tax purposes.


What Should You Do?

If you are thinking about investing in virtual currencies, our lawyers at the offices of Napoli Shkolnik PLLC cannot make any financial or economic recommendations, but can tell you that with all things in life, doing plenty of research first is always advised. Consumers should always be wary of any investment opportunities that promise high rates of return with little or no risk. Speak with your family and friends, a trusted banker or financial adviser before making any permanent decisions.