Convertible virtual currency is increasingly equated with the notion of real currency. Indeed, the increased acceptance of virtual currency as a payment method among retailers and consumers, the evolution of new types of virtual currency that alleviate price volatility, and the recent expansion of foreign country initiatives confirm the strong trajectory toward virtual currency’s function as a transactional currency. Yet, the tax system continues to classify all forms of virtual currency as “property,” and not “currency,” which results in immediate taxation every time someone buys something with virtual currency. This Article argues that the adopted tax treatment of virtual currency creates inequities, inefficiencies, and administrative burdens that could be remedied if a de minimis tax exemption were available like the one currently applicable to personal purchases using foreign currency.

Recent developments in the virtual currency space allow the government to reconsider its tax approach. As our view of currency changes over time, our tax characterizations should be re-examined. Virtual currencies are not a homogenous group; thus, adhering to a rigid, one-size-fits-all tax classification is unsound. This Article proposes a new principle-based classification system in which the government could isolate several criteria by which to judge the true nature of a virtual currency as either property (subject to general tax principles related to investment assets) or currency (subject to special tax rules applicable to foreign currency)—and tax it accordingly for all owners of that virtual currency.