Virtual currencies such as Bitcoin have created a whole new way to pay for things. However, the tax rules governing how to report virtual currency use are not as defined as they should be – possibly causing tax problems down the line. A recent Forbes article titled, “Bitcoin in IRS Crosshairs, Says Government Report” explains a new Government Accountability Office report (GAO) that suggests the IRS should watch Bitcoin and other virtual currencies closely and do a better job defining the basic tax reporting requirements.
Virtual currency can generate revenue through tax dollars because property and currency can be exchanged for real goods, services, and currency. The government wants in on the action and is recommending the IRS keep a watchful eye through regulation.
According to Forbes, the IRS started watching virtual currency issues in 2007. In 2009, the IRS posted on its website information about the tax consequences of virtual economy transactions. However, IRS has not provided taxpayers with information specific to virtual currencies. The article states the tax rules about Bitcoin are pretty clear:
- If you provide services or sell goods for Bitcoin, you have income.
- Income is income, whether you get it in cash or in kind.
Tax Evasion: Bitcoin may be accepted as currency and is not always traceable so some taxpayers could use them to hide taxable income and evade taxes. However, it seems most people aren’t even thinking about taxes when using Bitcoin which could create potential tax problems down the road.
Also, there appears to be confusion whether transactions in Bitcoin should be treated as property, barter, foreign currency, or a financial instrument. Article note: The Treasury unit, Financial Crimes Enforcement Network (FinCEN) already has rules about Bitcoin. It appears the IRS may follow with its own Bitcoin Center complete with rules and regulations.
The Forbes article points out that virtual currency itself raises tax compliance problems. The GAO report says that the current lack of proper guidance causes some people to assume tax doesn’t apply. As Bitcoin grows in use, this lack of knowledge about virtual currency taxation could result in unwitting taxpayers creating their own tax issues and needing tax relief. Tax professionals will need to keep up on tax policy relating to virtual currencies so they can better help consumers prevent IRS tax debt problems in the first place.
More Tax Help, IRS News and Tax Relief Tips:
- Swiss Bank Wegelin Avoids Court Appearance
- Swiss Pressured to Reveal All Offshore Accounts
- Ask the Certified Tax Specialist – Small Business Back Taxes
- Treasury Proposes Multilateral Agreement for Offshore Compliance
- Tax Relief-Bankruptcy and Tax Debt