IRS Could Begin Taxing Bitcoin and Other Virtual Currencies

[kcjenkins]

WASHINGTON, D.C. (JUNE 17, 2013)

BY MICHAEL COHN

The Internal Revenue Service plans to develop more guidance and training materials to inform taxpayers and tax preparers of the tax compliance risks associated with using virtual currencies like Bitcoin and “Linden dollars.”

A new report from the Government Accountability Office recommended that the IRS develop additional guidance to reduce the tax compliance risks of virtual economies and currencies, such as the type used in online multiplayer games. The GAO report noted that transactions within virtual economies or using virtual currencies could produce taxable income in various ways, depending on the facts and circumstances of each transaction.

For example, transactions within a so-called “closed-flow” virtual currency system do not produce taxable income because a virtual currency can be used only to purchase virtual goods or services. An example of a closed-flow transaction is the purchase of items to use within an online game. In an “open flow” system, a taxpayer who receives virtual currency as payment for real goods or services may have earned taxable income since the virtual currency can be exchanged for real goods or services or readily exchanged for government-issued currency, such as U.S. dollars.

“Virtual economies and currencies pose various tax compliance risks, but the extent of actual tax noncompliance is unknown,” said the GAO. “Some identified risks include taxpayers not being aware that income earned through virtual economies or currencies is taxable or not knowing how to calculate such income. Because of the limited reliable data available on their size, it is difficult to determine how significant virtual economy and currency markets may be or how much tax revenue is at risk through their usage. Some experts with whom we spoke indicated a potential for growth in the use of virtual currencies.”

Recent years have seen the development of virtual economies, such as those within online role-playing games such as Second Life and World of Warcraft, through which individual participants can own and exchange virtual goods and services. Within some virtual economies, virtual currencies have been created as a medium of exchange for goods and services.

Virtual property and currency can be exchanged for real goods, services and currency, and virtual currencies such as Bitcoin have been developed outside of virtual economies as alternatives to government-issued currencies, such as dollars. In some cases the virtual goods are auctioned off on sites like eBay. These innovations raise questions about the related tax requirements and potential challenges for IRS compliance efforts.

http://www.accountingtoday.com/news/IRS-Taxing-Bitcoin-Virtual-Currencies-67128-1.html?ET=webcpa:e7258:61496a:&st=email

[Guest Taxed]

In the age of iPhones and iPads the next generation will be using more and more of these virtual currencies for purchasing goods and services on the internet. It will be a whole new ball game!

Now an then I get asked if I accept PayPal. Soon PayPal will be the grand daddy of virtual currencies.

[JohnH]

It's fascinating how much I use PayPal - it has probably increased five-fold just in the last couple of years. It's safe, secure, and easy to manage. Much better than writing checks or using credit cards. It's easy to offer to clients for invoice payments too.

[Jack from Ohio]

In the age of iPhones and iPads the next generation will be using more and more of these virtual currencies for purchasing goods and services on the internet. It will be a whole new ball game!

Now an then I get asked if I accept PayPal. Soon PayPal will be the grand daddy of virtual currencies.

PayPal is not a virtual currency. PayPal uses US $.

[jainen]

>>the extent of actual tax noncompliance is unknown<<

Why would they say a stupid thing like that? Everyone knows the extent of actual tax non-compliance!

By the way, does this mean I can take a capital loss on my Green Stamp books? I just tried to redeem them and doggone if they ain't worthless!

[Lion EA]

Green Stamps are gone?! Thank goodness Hostess cupcakes are returning...