Bitcoin and the IRS

A Notional BitcoinA recent Government Accountability Office (GAO) report has decided that the IRS could do a better job telling people they have to pay tax on Bitcoin transactions. 1

Here’s a couple of primers from the study:

  1. Bill is a Bitcoin miner. He successfully mines 25 Bitcoins. Bill may have earned taxable income from his mining activities.
  2. Carol makes T-shirts and sells them over the Internet. She sells a T-shirt to Bill, who pays her with Bitcoins. Carol may have earned taxable income from the sale of the T-shirt.

Basically the report says the IRS should watch Bitcoin like the proverbial hawk. 2

The GAO believes that providing informal information to taxpayers about how their online activities could result in a real-world tax bill would motivate them to report the attendant taxes. 3

The GAO believes taxpayers might not realize they have a tax liability tied to their virtual activity, or might be aware of the obligation but unsure how to characterize or calculate it for tax purposes. 4

Cutting to the chase we discover that the report was sponsored by the Senate Finance Committee. Those “worthies” requested GAO to review virtual economies and the currencies they use for potential tax issues.

Of course the IRS has already done some survey work on their own. But, given how rapidly the virtual money world is changing (plus, as of this writing, how little virtual currencies appear as yet a  major tax compliance threat) and the fact that the government moves, when at all, glacially, the IRS han’t adopted a compliance framework or published any guidance. 5

Enforcement is yet another hairball; it is one thing to add another tax form or two to the pantheon of forms that describe the tax code, it’s entirely another to audit and enforce taxes on those scofflaws who don’t file. Where’s the money? How does the IRS prove it’s existence, much less establish its connection to a single individual?

If only there was some over arching surveillance program, a system that monitored every thought, email, document, porn site visit and financial transaction Americans engaged in electronically. Oh, if only…

Until such time it looks like Americans using virtual currencies can continue the time honored tradition of flipping off the tax man.

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Show 5 footnotes

  1. Ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha.
  2. Or an osprey. Or some other eagle-eyed flying…you know…bird thing. Our own two cents? Stay with what you know, play to your strength: the IRS should watch Bitcoin like the cats-paw of the Administration it so obviously is.
  3. Ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha.
  4. Ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha. Man, that GAO – they crack me up.
  5. In this they’re behind Treasury, which has already issued rules on the topic.

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