What is virtual currency?
As defined by the IRS (2021), virtual currency is “a digital representation of value that functions as a medium of exchange, a unit of account, and/or store of value” . In other words, it represents a monetary value that can be bought, sold or exchanged into “real money”. However, in some environments, it operates similar to “real” money, having an equivalent value in real currency but not backed by a central bank. When this is the case, it can be referred to as “convertible” virtual currency. The famed Bitcoin (BTC) is one example of a convertible virtual currency along with Ethereum (ETH), Litecoin (LTC), Cardano (ADA) and more than 4,000 others in existence as of January 2021.
It is also important to make a distinction between crypto currency and virtual currency. Crypto currency is a type of virtual currency that utilizes cryptography to validate and secure transactions that are digitally recorded on a decentralized ledger for added anonymity and protection.