And how interesting it is:
Developed in 2009 by an anonymous programmer or
programmers, bitcoin is a privately-issued digital currency that exists only
as a long string of numbers and letters in a user’s computer file
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IRS is responsible for ensuring taxpayer compliance for all economic
areas, including virtual economies and currencies. One mechanism that
assists IRS in enforcing tax laws is information reporting, through which
third parties report to IRS and taxpayers on certain taxpayer transactions.
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U.S. tax laws and regulations generally require
taxpayers to report and pay taxes on all income, regardless of the source
from which the income was derived
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Ann plays an online game and amasses virtual tools that are valuable
to her avatar. The online game does not allow users to directly
exchange their virtual tools for U.S. dollars, but rather they can do so
using a third-party, making this a hybrid system. Ann uses a thirdparty exchange not affiliated with the online game to coordinate the
transfer of her virtual tools to another player in exchange for U.S.
dollars. The transfer is conducted by the third-party exchange and
payment is mediated by a third-party payment network. Ann may have
earned taxable income from the sale of these virtual tools.
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Bill is a bitcoin miner. He successfully mines 25 bitcoins. Bill may
have earned taxable income from his mining activities.
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Carol makes t-shirts and sells them over the Internet. She sells a tshirt to Bill, who pays her with bitcoins. Carol may have earned
taxable income from the sale of the t-shirt.
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These risks are not unique to virtual economies and currencies, as they also exist for
other types of transactions, such as cash transactions, where there are
not always clear records or third-party tracking and reporting of
transactions
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If taxpayers using virtual currencies turn to the Internet for tax help, they
may find misinformation in the absence of clear guidance from IRS.
For example, when we performed a simple Internet search for
information on taxation of bitcoin transactions, we found a number of
websites, wikis, and blogs that provided differing opinions on the tax
treatment of bitcoins, including some that could lead taxpayers to
believe that transacting in virtual currencies relieves them of their
responsibilities to report and pay taxes.
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According to IRS compliance officials, IRS ultimately decided not to
pursue these actions in light of available IRS resources and other higher
priority needs. Also, IRS did not find strong evidence of the potential for
tax noncompliance related to virtual economies, such as the number of
U.S. taxpayers involved in such activity or the amount of federal tax
revenue at risk.
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IRS has not assessed the tax compliance risks of open-flow virtual
currencies developed and used outside of virtual economies. These types
of currencies, generally, were introduced after IRS’s last review of
compliance related to virtual economy transactions. According to IRS
compliance officials, IRS would learn about tax compliance issues related
to virtual currencies as it would any other tax compliance issue, such as
IRS examiners identifying compliance problems during examinations or
taxpayers requesting guidance on how to comply with certain tax
requirements. To date, these processes have not resulted in IRS
identifying virtual currencies used outside of virtual economies as a
compliance risk that warrants specific attention.
And finally the conclusion:
Virtual economies and the use of virtual currencies intended as
alternatives to government-issued currencies are a recent phenomenon,
and the extent to which their use results in tax noncompliance is
unknown. Given this uncertainty, available funding, and other priorities,
IRS made a reasoned decision not to implement a compliance approach
specific to virtual economies and currencies. However, IRS did see value
15Although IRS has not issued guidance, another Department of the Treasury agency, the
Financial Crimes Enforcement Network, recently issued interpretive guidance clarifying
the treatment of persons creating, obtaining, distributing, exchanging, accepting, or
transmitting virtual currencies. However, such guidance does not discuss the tax
treatment of virtual currency transactions. FIN-2013-G001
in providing taxpayers with information on the tax consequences of virtual
economy transactions, a low-cost step to potentially mitigate some of the
noncompliance risk associated with such transactions. The uncertainty
about the extent virtual currencies are used in taxable transactions and
any associated tax noncompliance means that costly compliance
activities are not merited at this time. However, the fact that
misinformation is circulating and the possibility of growth in the use of
virtual currencies outside virtual economies suggest that it would be
prudent to take low-cost steps, if available, to mitigate potential
compliance risks. The type of information IRS provided about virtual
economy transactions is one model.
