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Virtual money, real value

Johanna Schmeller / uhe
August 22, 2013

Germany has recognized the online currency bitcoin as a legal unit of currency. The move improves the virtual currency's image, but also means the people who have bitcoins will have to answer to the tax man.

A coin worth 75 bitcoins Photo: AP Photo/Rick Bowmer
Image: picture-alliance/AP

From food to toilet paper, and drugs to weapons - everything is available on the Internet and, increasingly, purchases are paid with virtual currencies such as bitcoin.

The German Finance Ministry has recently recognized bitcoin as a currency unit and as private money, subjecting holdings of bitcoins to German tax laws.

The move has somewhat polished up bitcoins still dubious image, putting Internet trading in the currency on a legal footing and allowing the exchange of the virtual currency into real dollars or euros. Online currency conversion sites determine the value of Bitcoins according to supply and demand.

Currently, one bitcoin is valued at about $110 (82 euros) with overseer group Bitcoin Foundation limiting the total number of currency units to 21 billion.

Taxable income

However, since bitcoin was not universally recognized as a currency it remained private money, the German Finance Ministry said. Nevertheless, the cyber currency was subject to German tax laws, the ministry said, including value-added tax on sales and income tax on profits garnered from bitcoin business.

computer showing a bitcoin wallet webpage Photo by Sean Gallup/Getty Images
Launched in 2009 in response to the financial crisis, Bitcoin wants to be a currency independent of big banksImage: Getty Images

Wild swings

In spite of the recognition by Germany, the acceptance of bitcoins among online shoppers has remained mixed.

Left-wing anarchists see the virtual currency as a weapon in the ideological battle against finance capitalism. In Berlin's anarchist scene, bitcoins are accepted as alternative currency in some shops.

Mainstream online buyers, however, fear a higher risk of fraud that goes along with trades in the still unregulated currency.

Moreover, the bitcoin value has swung wildly in recent months. In 2012, the currency traded at 5 euros to one bitcoin, suddenly spiking to 200 euros six months ago and slumping to half that value within hours after the record high.

Lack of control

The incident was testimony to the risks involved in virtual currency trading, as well as a lack of control, said Markus Demary from the Cologne Institute for Economic Research.

Noting that bitcoin and other cyber currencies were not created by a central bank, he told DW that the safety of individual accounts depended primarily on the standards adopted by the issuing organization. Moreover, they were not backed by other holdings like in a normal bank, he added.

Most importantly, the absence of central bank administration and state control would leave the door wide open for money laundering and other criminal activities within the currency realm.

The word bitcoin in a QR code Photo by Sean Gallup/Getty Images
As cyber crime rises, digital currencies like bitcoin increasingly adopt anti money-laundering rulesImage: Getty Images

Cyber fraud

In May, US authorities closed Costa Rica-based digital currency operator Liberty Reserve claiming the platform had enabled criminal gangs to launder more than $6 billion.

Earlier this month, New York's Department of Financial Services announced a probe into Bitcoin and other currency operators. Prosecutors said the organizations threatened national security as they were used by drug traffickers and gun runners.

Bitcoin Germany Chief Executive Oliver Flaskämper countered that all currencies, including cash, gold and diamonds, could be used for illegal purposes.

"Banning virtual currencies on grounds that they might be used for shady deals, is like banning encryption of e-mails because they might conceal criminal content," he told DW.