Bitcoin is a private currency that is not under the control of a central bank. For these reasons, Bitcoin is attractive to many investors. For these same reasons, Bitcoin transactions are viewed suspiciously by the IRS and taxing authorities.
The use of Bitcoin and other so-called “virtual currencies” has increased dramatically in recent years. In fact, while Bitcoin’s value has fluctuated wildly in recent weeks and days, overall Bitcoin’s value has nearly quadrupled in the last year.
How is Bitcoin currently taxed?
The IRS views Bitcoin and other virtual currencies as equivalent for tax purposes. Presently, taxpayers must report any virtual currency from wages, capital gains or realization of gross income. While these regulations appear to be relatively straightforward, other details of taxing Bitcoin are not necessarily settled.
What does Congress want from the IRS?
In June, members of Congress called upon the IRS to provide further guidance as to the tax consequences and reporting requirements of Bitcoin. In a letter to IRS Commissioner John Koskinen, Congressmembers Jared Polis (D., Colorado) and David Schweikert (R., Arizona) requested that the IRS take the following actions:
- Create a uniform virtual currency strategy, especially in regards to enforcement of the Bank Secrecy Act (BSA).
- Develop updated guidance as to the documents and “tax treatments needed for the various uses of virtual currencies.”
- Update reporting documents for third parties to identify virtual currency in taxable transactions.
By taking these steps, the IRS could compel greater enforcement and clarity among virtual currency users. In 2016, the IRS indicated a desire to take these steps, but has not yet done so.
Bitcoin litigation remains unsettled
Taxing Bitcoin remains uncharted territory in many ways. We have previously spoken in this space about the IRS’s court fight against Coinbase, the biggest Bitcoin trader. In recent months, the IRS has gone to court in an attempt to gain access to the many millions of Bitcoin transactions that Coinbase has facilitated. This litigation is ongoing.
Complex tax issues, whether they regard virtual or real currency, demand exceptional lawyers. At Goldburd McCone, our attorneys represent individual and business taxpayers across New York, the United States and the world.