Virtual currency is a digital representation of value.
The IRS describes convertible virtual currency as a virtual currency with an equivalent value in real currency or acting as a substitute for real currency. Real currency is “the coin and paper money of the United States or 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.” The virtual currency currently has limited legal tender around the world (examples of the legal tender so far are Bitcoin in El Salvador and the Central African Republic).
Virtual currency, or cryptocurrency, is considered a form of property, and the standard tax regulations that apply to property transactions also apply to transactions involving virtual currency. When a person sells virtual currency, they are required to recognize any gain or loss, subject to any limitations on the deductibility of capital losses.