IRS continues to remain silent on Bitcoin tax liability

By Mike Flacy January 27, 2014

Image used with permission by copyright holder

Mentioned by the National Journal this week, anyone that’s curious how to report Bitcoin earnings on their 2013 tax filing this year has yet to receive substantial directions from the Internal Revenue Service. With tax filing expected to start on January 31, 2014, anyone that’s sold Bitcoin for U.S. dollars may have to wait until the IRS releases a declarative statement on the subject.

According to the Journal, the issue is related to how the Federal government will eventually classify Bitcoin. For instance, taxing it as a commodity would fall under the capital gains umbrella while taxing it as a currency would be a much higher tax rate, much like regular income.

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In an emailed statement sent to the National Journal, IRS representatives state “The IRS is aware of the potential tax-compliance risks posed by virtual currencies. The IRS continues to study virtual currencies and intends to provide some guidance on the tax consequences of virtual-currency transactions.” IRS representatives did not indicate when the government agency will release a statement regarding Bitcoin or other virtual currencies that have grown in popularity in the past few years.

How-to-buy-Bitcoin-Litecoin-DogeCoin — Image used with permission by copyright holder

The closest mention to virtual currency made by the IRS was created in reference to income earned from online transactions in virtual world games like World of Warcraft or Second Life. Specifically, the IRS states “In general, you can receive income in the form of money, property, or services. If you receive more income from the virtual world than you spend, you may be required to report the gain as taxable income. IRS guidance also applies when you spend more in a virtual world than you receive, you generally cannot claim a loss on an income tax return.“

In an interview with the Wall Street Journal last month, certified public accountant Jonathan Horn tells his clients “If you take a reasonable position, they (the IRS) probably will accept it.” However, he does warn that Bitcion users that hide earnings from the IRS could “open themselves to penalties, interest and possible fraud prosecution.”

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