Bitcoin transactions taxable, says GAO

Some transactions involving bitcoin and other virtual currencies are subject to federal taxes, the Government Accountability Office concluded in a report issued Monday. 

Formal rules could be premature in the unregulated and fast-evolving virtual money markets that have cropped up in recent years, as gamers trade digital dollars for real-life goods and services, Congress’s investigative arm found.

But the Internal Revenue Service should take action to make sure people obey tax laws already on the books, according to the agency.

“By not issuing guidance, IRS may be missing an opportunity to address virtual currency tax compliance risks,” the Office concluded in a 27-page report.

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Sens. Max Baucus (D-Mont.) and Orrin Hatch (R-Utah), who serve as the chairman and ranking member on the Senate Finance Committee, respectively, requested the study.

Bitcoin and alternative virtual currencies have exploded over the last decade. As of May 1, there were 11 million bitcoins in circulation, according to the report. Each is valued at more than $100, though exchange rates have been volatile.

From May 2012 through February 2013, prices ranged between $5 and $20 for one bitcoin. Between April 1 and May 1 of this year, they fluctuated between $79 and more than $237, GAO found.

During the same time period, the number of bitcoin transactions per day have ranged from approximately 8,000 to as many 70,000, according to the study.

Virtual currencies have come under increased scrutiny from lawmakers and regulators, as their use has bled outside of digital world.

“Bitcoins act as a real world currency in that users pay for real goods and services, such as coffee or web development services, with bitcoins as opposed to U.S. dollars or other government currencies,” the report found.

In those cases, bitcoins should be considered taxable earned income, and must be reported to the IRS. But the GAO concluded that many questions remain about whether taxpayers understand their requirements, how virtual income should be characterized and the extent to which people are using bitcoin or other digital currency to evade taxes.

“Given the uncertain extent of noncompliance with virtual currency transactions, formal guidance, such as regulations, may not be warranted. However, IRS may be able to develop more timely and less costly informal guidance,” the report argued. “Posting such information would be consistent with IRS’s strategy for preventing and minimizing taxpayers’ noncompliance by helping them understand and meet their tax responsibilities."