As technology continues to evolve at breakneck speed, the tax treatment of virtual currency has reached an inflection point. Now, given its shifting dynamics, how should we classify and tax virtual currency? This Note argues that the primary differentiator amongst the many different forms of virtual currency lies in its ability to be sold or exchanged for real world goods and services. The Internal Revenue Service (“IRS”) currently treats all transactions involving virtual currency as a realization event, requiring taxpayers to calculate their tax consequences even in situations where there is no receipt of a real-life benefit. This Note suggests that the IRS should adopt the proposed Cryptocurrency Tax Fairness Act along with the more sensible three-part definition of virtual currency as introduced by the U.S. Government Accountability Office. Taxpayers should not have to worry about whether or not their use of virtual currency solely in the virtual world will result in real-world taxable income.
The full text of this Note is available to download as a PDF.