What is Cryptocurrency and How is It Taxed

Background on Cryptocurrency

Cryptocurrency is digital “money” used as a medium of exchange in the world market. There are more than 1,500 known virtual currencies, with the most popular being Bitcoin. Bitcoin is a digital token — with no physical backing —not backed by gold or paper bills.

Back in the day, when a cashier received a bill over $100.00 that cashier would use a fancy pen to draw a line across the bill to ensure the bill was real. This same premise is applicable to cryptocurrency. Imagine that you are looking to purchase a digital coin, before you complete the purchase you would need to verify that the coin you are purchasing is “real,” that the coin was not a hoax nor stolen, and that you will have rightful possession of the coin at the completion of your purchase. To address such issue, coins are an authenticated by ledgers, which record all transactions involving that specific coin. Anyone in the world can contribute to a coin’s ledger—even you, if you have a computer handy.