Although in its infancy, the taxation of virtual currency possesses complex issues.
A virtual currency has no physical form, and it does not provide its owner with any inherent rights to property or another currency. Traditionally, the central bank of a sovereign nation creates currency. However, no centralized authority, governmental or otherwise, controls the digital system.
Virtual currency is an emerging financial medium which may be used to pay for goods or services, or held for investment. These virtual currencies are a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. In some environments, it operates like "real" currency—i.e., the coin and paper money of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance—but it does not have legal tender status in any jurisdiction.
Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as "convertible" virtual currency. Bitcoin is one example of a convertible virtual currency. Bitcoin can be digitally traded between users and can be purchased for, or exchanged into, U.S. dollars, Euros, and other real or virtual currencies.
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