What is considered a convertible virtual currency?
Convertible virtual currency is an uncontrolled digital currency. Still, it can be used as a substitute for a real and legally recognized currency, even if it does not have a legal tender status. Convertible digital currencies can be easily exchanged with fiat currencies, such as dollars, cryptocurrencies exchange.
This can be compared to non-convertible virtual currencies that are not used in foreign trade or directly interchangeable with other currencies, such as virtual currency contained in a video game environment.
Summary
Bitcoin, Ether, and Ripple are examples of virtual convertible currencies.
Convertible virtual currency is a crypto-currency that can be exchanged for fiat currencies or used directly for legitimate exchange and payment forms.
These currencies differ mainly from government-backed currencies, such as the dollar, in that they have no tangible presence and are not issued nor regulated by a government. Instead, it works on decentralized blockchain networks.
How convertible virtual currency works
Convertible virtual currency is one example of how technology advancements are causing disturbing changes in the traditional way of doing things worldwide. This is especially true of the methods of payment and the purchase of goods and services.
Definitions of convertible virtual currency
According to the Financial Crimes Enforcement Network (a bureau of the U.S. Treasury), virtual currency is defined as "a medium that functions like currency in some circles, but does not have all of the attributes of real money." Convertible virtual currency generally has a measurable value in real money, but its interchangeable ability makes it convertible. Not all virtual currencies can be exchanged against legal tender; therefore, not all virtual currencies are convertible.
The U.S. government's Internal Revenue Service (IRS) defines convertible virtual currency as a virtual currency with real currency value. This means, for the IRS, "Bitcoin, Ether, and Litecoin, are a few examples of convertible virtual currency. Virtual currencies can be exchanged digitally between users and can be bought or exchanged for U.S. dollars, and other real or virtual currencies."
Another feature of convertible virtual currencies that makes them similar to state-guaranteed currencies is their tax liability, at least in the United States: The sale or exchange of cryptocurrencies or the use of crypto or virtual currencies to pay for goods or services or having money as an investment usually has tax consequences.
Popular convertible virtual currencies
The most common form of virtual currency remains Bitcoin. Bitcoin operates on a decentralized peer-to-peer network that uses blockchain technology to prevent fraud and control the money supply. On the other hand, central banks and state treasuries (like the United States) control the money supply by printing money out of circulation, raising and lowering interest rates on loans, and pursuing counterfeits.
Bitcoin is a convertible virtual currency since it can be changed for real money based on its determinable market value. Bitcoin's dollar value had grown from just $13 in 2012 to over $ 40,000 in December 2020, and currently at $37,600 (as at the time of this article). Other popular virtual currencies are Ethereum, Zcash, Monero, Dash, Ripple, and Litecoin.
Practical examples of convertible virtual currencies
Virtual currency can be converted into cash through online exchanges or brokers. Exchanges such as Coinbase and Bitstamp allow users to exchange their Bitcoin for their local currency. The owner of Bitcoin places a sell order as they would if they were trading with a broker. The sales order includes the Bitcoin amount and the price per currency. Your account is credited in local currency when your order matches a corresponding purchase order.
Bitcoin can also be exchanged for real currencies using Bitcoin ATMs, which are only available in certain countries. While online trading can take several days for the Euro or Dollar to transfer to a user's account, it only takes a few seconds for Bitcoin ATMs to complete the transaction. Convertible virtual currencies can also be centralized.
The legal status of convertible virtual currencies
The nature of virtual convertibles makes them susceptible to being used as vehicles for money laundering, tax evasion, and terrorist financing. This has led some countries to propose regulatory measures on how currencies will be respected and used for tax purposes.
In the United States, FinCen guidelines state that virtual currency that can be exchanged for recognized money is property, and not money, and will be treated as such. Therefore, the tax principles that apply to real estate transactions apply to these types of currencies. The taxpayer who receives Bitcoin in exchange for goods and services must record the virtual currency's fair value in U.S. dollars on the date of receipt. This amount is included in the calculation of the annual gross income of the taxpayer.
A virtual currency used for investment is considered an equity asset and is subject to capital gains or losses tax.
Can't Escape Taxes
Taxes and death are the two things no one can escape, and the U.S., Internal Revenue Service, is now making it clear that it wants to know how much cryptocurrency you are trading.
According to a draft IRS document, U.S. Personal Income Tax Form 1040 will now contain a section asking if the filer was involved in a "acquisition or disposition of a financial interest in virtual currency" during the past year.
Buying cryptocurrencies in dollars is not a taxable event, but selling them and making a profit is. It looks like the IRS, which collects data from cryptocurrency exchanges and blockchain monitoring software, wants to know what capital gains Americans are making from other financial instruments and make sure that taxes are paid.
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