IRS under pressure to clarify bitcoin rules

The Internal Revenue Service is under mounting pressure to issue guidance clarifying how taxpayers should handle transactions involving bitcoin and other digital currencies.

In an annual report to Congress, National Taxpayer Advocate Nina E. Olson said the IRS has failed to provide clear guidelines for unregulated and fast-growing virtual money markets.

{mosads}“It is the government’s responsibility to inform the public about the rules they are required to follow,” according to the report, unveiled Thursday. “The lack of clear answers to basic questions such as when and how taxpayers should report gains and losses on digital currency transactions probably encourages tax avoidance.”

Bitcoins exists only online, but they can be used to buy real-world goods and services and are accepted by a growing number of Internet retailers.

Its use is on the rise, increasing by more than 75 percent — from about 1,700 transactions per hour to more than 3,000  — in the four months between July and December 2013, the Taxpayer Advocate’s report found.

Over the same period, the market value of bitcoins in circulation spiked exponentially, from about $1.1 billion to $12.6 billion. More than 10,000 businesses reportedly accept payment in bitcoins, according to the report.

The Government Accountability Office (GAO) concluded last year that some transactions involving virtual currencies are subject to federal taxes. At the time, Congress’s investigative arm said formal rules might be premature, given the evolving nature of the market.


But the GAO said the IRS should take action to make sure people obey tax laws already on the books.

To that end, the Taxpayer Advocate report issued on Thursday calls for guidance detailing when digital currency transactions trigger losses or gains, and when they amount to capital gains.

The IRS should also explain how taxpayers should record and report the transactions, the report found.

Sen. Tom Carper (D-Del.) echoed Olson’s call for additional guidance.

“We live in an increasingly technology-dependent world, which impacts every aspect of our lives, including how we conduct commerce and pay our taxes,” said Carper, chairman of the Senate Homeland Security and Government Affairs Committee.

“Our government has to recognize this reality and adapt accordingly,” he said. “We can’t afford to be behind the curve here.”