In our last column, we wrote about the virtual currency known as bitcoins.1 We described how bitcoins work and the increasing acceptance of bitcoins as an alternative to traditional fiat currency. We cautioned, however, that the global regulatory treatment of bitcoins remained uncertain. Recent regulatory developments throughout the world have in some senses provided greater clarity as to the treatment of bitcoins by regulators, but that treatment and certain revelations involving bitcoin exchanges have raised concerns about the viability of bitcoins and other virtual currencies as an alternative to traditional fiat currency (money declared by a government to be legal tender).
Most significantly, the announcement by the Internal Revenue Service that it considers bitcoins and other virtual currencies to be “property,” rather than a currency, for U.S. tax purposes imposes greater reporting obligations on virtual currencies than on fiat currencies. As set forth below, this undermines the very purpose for which bitcoins were originally intended—as a low-cost alternative to fiat currencies.
Revelations
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