The Internal Revenue Service (IRS) has been sending letters to taxpayers who are involved in activities that use virtual currency to complete transactions. Though sent as educational notices, these letters may indicate that a person could be subject to a tax audit. Individuals or entities may receive this type of notice if they failed to report income or failed to pay taxes on virtual currency transactions. 

What Is Virtual Currency?

Virtual currency, also known as cryptocurrency, is a digital form of money that is issued and controlled by program developers. People may accept these currencies as a medium of exchange just like U.S. currency, or cryptocurrencies may be converted into cash or other forms of virtual currency. Virtual currency is deemed to be property for federal income tax purposes.