The IRS's vague definition of taxable virtual currencies may have helped miners and early investors in various new "alt-currencies" avoid tax-reporting requirements for currencies of negligible current value. In its rulings, the agency borrowed a distinction from the Financial Crimes Enforcement Network's (FinCEN) early guidance by separating widely traded "convertible" virtual currencies such as Bitcoin from other virtual currencies, noting that only convertible virtual currencies that have an "equivalent value in real currency, or that acts as a substitute for real currency" will be considered taxable.

There seem to be two tests for whether a virtual currency is considered convertible. The first asks whether a given currency is "listed on an exchange and the exchange rate is established by market supply and demand," which would make it convertible to another "real currency" like the U.S. dollar. This begs the question of whether virtual currencies that are thinly traded on offshore exchanges, and may only trade with respect to other convertible virtual currencies like Bitcoin and Litecoin, are taxable at all this year. Because the IRS has made it clear it plans to tax gains on successful convertible virtual currencies retroactively, Joe may find himself in a situation where he feels he can skirt tax reporting for lower-value alt-currencies like Dogecoin for now, and simply report them in the future if and when those currencies appreciate in value and trade over well-regulated U.S. exchanges.

The second test asks whether investors can buy anything tangible with that currency, or if its value is instead driven entirely by speculation. As the IRS outlined, "The sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability." If a new currency isn't demonstrably valuable in commerce, is it truly "convertible"?

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