First – On 11/8/21, the Treasury Inspector General for Tax Administration (TIGTA) released a report (dated 9/21/16) – Rising Use of Virtual Currencies Requires IRS to Take Additional Actions to Ensure Taxpayer Compliance. Per the release:
Alternative payment methods, such as convertible virtual currencies, have grown in popularity in recent years and have emerged for some people as a potential alternative to using traditional currencies like U.S. dollars. Virtual currencies offer potential benefits over traditional currencies, including lower transaction fees and faster transfer of funds for services provided. However, some virtual currencies are also popular because the identity of the parties involved is generally anonymous, leading to a greater possibility of their use in illegal transactions. Recently, many types of virtual currencies have been created for use in lieu of currency issued by a government to purchase goods and services in the real economy. The overall objective of this review was to evaluate the IRS’s strategy for addressing income produced through virtual currencies.
In the report, TIGTA recommends the following actions for the IRS:
- develop a coordinated virtual currency strategy that includes outcome goals, a description of how the agency intends to achieve those goals, and an action plan with a timeline for implementation;
- provide updated guidance to reflect the necessary documentation requirements and tax treatments needed for the various uses of virtual currencies; and
- revise third-party information reporting documents to identify the amounts of virtual currencies used in taxable transactions.
TIGTA also notes that in Notice 2014-21, the IRS sought comments and received many, but has not issued any additional guidance. One of these letters was from the AICPA and listed ten areas where additional guidance would improve compliance and provide clarity (6/10/16 letter).
Second – Also this month, the IRS filed a petition in District Court to obtain two years of records (2014 and 2015) from Coinbase (U.S. v. John Doe, No. 3:16-cv-06658-JSC (ND CA 11/17/16)). The 16-page petition explains how virtual currency works and what Coinbase does. The IRS believes that some of its customers have not complied with the tax laws.
The IRS notes the following bitcoin usage: “As of January 2016, it was reported that more than 100,000 merchants globally were accepting bitcoin payments with businesses such as Overstock.com, Home Depot, DirectTV, Dell, Microsoft, Amazon, and Expedia topping the list. By Fall 2016, the number of merchants is forecast to grow to 150,000. With bitcoin, a user can buy webhosting services, cars, homes, and even pizza and manicures. In 2015, there were 125,498 bitcoin transactions per day. Using the total bitcoins traded in 2015 and the 2015 bitcoin average price, I calculated the 2015 annualized transaction value in U.S. dollars to be $10,116,817,608.”
IRS concerns include no information reporting for the transactions, articles about people using bitcoin to avoid tax reporting, exchanging money for virtual currency through foreign banks, and use for crimes including money laundering.
What do you think? Any virtual currency tax issues you see?
Annette Nellen, CPA, Esq., is a professor in and director of San Jose State University’s graduate tax program (MST), teaching courses in tax research, accounting methods, property transactions, state taxation, employment tax, ethics, tax policy, tax reform, and high technology tax issues.
Annette is the immediate past chair of the AICPA Individual Taxation Technical Resource Panel and a current member of the Executive Committee of the Tax Section of the California Bar. Annette is a regular contributor to the AICPA Tax Insider and Corporate Taxation Insider e-newsletters. She is the author of BNA Portfolio #533, Amortization of Intangibles.
Annette has testified before the House Ways & Means Committee, Senate Finance Committee, California Assembly Revenue & Taxation Committee, and tax reform commissions and committees on various aspects of federal and state tax reform.
Prior to joining SJSU, Annette was with Ernst & Young and the IRS.
1 comment on “Virtual Currency – Recent Tax Matters And Concerns”
Is there an estimate of the cost to the government for unreported income connected with the use of virtual currencies?
I am at the Loyola School of Law’s Western Conference on Tax Exempt Organizations. The IRS mentioned yesterday that a crackdown on virtual currency reporting is a part of their emerging issues plan for 2017.
Comments are closed.