I've been told by many people that bitcoins are fully legal to use as currency, but not legal to convert to USD and use as US currency.
Is this true? If so, what references back this up? If not, what references deny it?
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I'd actually like to see a reference to someone saying that it's illegal.
...because it's legal.
FinCEN guidance establishes who must register with government and when one must pay taxes (sell bitcoin for USD, pay taxes on gains).