I realize the idea of virtual currency sounds kinda like play money, so I’ll try to explain it a little more clearly. Let’s say that you go to a pizza arcade where they use tokens instead of quarters. Everything from games to food to prizes has to be redeemed in tokens. So, you find the coin machine and purchase 4 tokens for $1 (or 40 tokens for $10, etc.).

There is a stuffed animal behind the prize counter that you really like, and it costs 4 tokens. The difference between this pizza arcade and the ones you might be familiar with is that the person behind the counter doesn’t actually work for the arcade; she leases the booth space to sell her stuffed animals for tokens (like a flea market type of setup). You pay the 4 tokens, receive your new stuffed animal and go on about your merry way. The booth vendor has just made 4 tokens, but she can’t spend them outside of the pizza arcade, because regular stores only accept dollars, not tokens.

So, the question is: Did the booth vendor make income on that sale? If yes, how can you prove it? She has no dollars to show for her efforts, only tokens that aren’t worth anything in the outside world.

Ok, so let’s say the booth vendor takes the 4 tokens that she earned to the pizza arcade manager and asks him to exchange them for a $1 bill. Now, has she made income? Yes! She now has a dollar that is worth something in the outside world.

This example might seem like small potatoes in the grand scheme of global commerce, but let’s say that instead of selling just one stuffed animal, she sold 50 … or 500 … or 5,000. Now, the money starts to add up. The current position (of the U.S., that is … other countries have differing opinions) is that as long as she keeps her earnings in token form (maybe she treats herself to pizza and video games in the arcade), then it’s a wash. However, as soon as she converts her tokens to dollars, then she needs to be conscientious about taxable earnings.

The moral of the story is that virtual currency may not seem “real,” but it has real value.