# Virtual Currency & Cryptocurrency

![](https://3578954321-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2FPxQfv0DcOQOVwZp3E7YI%2Fuploads%2FDkBHFaUvPPaYzOQ6JTJ6%2FTaxGuideImagesCryptoassets.jpg?alt=media\&token=970a4bbc-ac39-476c-ab41-0d98575247dd)

## What is Virtual Currency?

The IRS uses the term [“virtual currency”](https://www.irs.gov/pub/irs-drop/n-14-21.pdf) to describe cryptocurrency. (The term is also used for other types of currency used as a medium of exchange, such as digital currency). 

Virtual currency is a digital representation of value, other than a representation of the U.S. dollar or a foreign currency (“real currency”), that functions as a unit of account, a store of value, and a medium of exchange. Some virtual currencies are convertible, which means that [they have an equivalent value in real currency or act as a substitute for real currency](https://www.irs.gov/pub/irs-drop/rr-19-24.pdf).

## What is Cryptocurrency?

[Cryptocurrency is a type of virtual currency](https://www.irs.gov/pub/irs-drop/rr-19-24.pdf) that uses cryptography to secure transactions that are digitally recorded on a distributed ledger, such as a blockchain.

A transaction involving cryptocurrency that is recorded on a distributed ledger is referred to as an “on-chain” transaction; a transaction that is not recorded on the distributed ledger is referred to as an “off-chain” transaction.