Bitcoin is growing in popularity as a form of currency but the IRS has not explained how existing rules apply to digital currency transactions with enough specific¬ity to allow taxpayers to be sure they are following them or for IRS employees to enforce them, the National Taxpayer Advocate has said in calling for clarification.
Bitcoins are long alphanumeric strings that are created from an algorithm that will allow only 21 million to be “mined” in total. It’s a digital currency cannot readily be manipulated by government fiscal policy and can be used for quick, anonymous and irreversible transactions. The grey area of what tax rules apply remains attractive to some, and has lent therelatively anonymous currency an illicit image because of its use on online black markets, mostly to buy and sell drugs.
The Taxpayer Advocate called on the IRS to clarify when receiving or using digital currency can trigger gains and losses; When gains and losses would be taxed as ordinary income or capital gains; What information reporting, withholding, backup withholding, and record keeping requirements apply to digital currency transactions; and, When should digital currency holdings be reported as foreign asset statements.
The chair of the Senate Homeland Security and Governmental Affairs Committee, Tom Carper, D-Del., echoed the request from Taxpayer Advocate Nina Olsen, made in her annual report to Congress. “I couldn’t agree more,” Carper wrote, adding, “I am hopeful that the new [IRS] commissioner, John oskinen, takes these recommendations to heart and acts expeditiously to provide thoughtful guidance to taxpayers regarding the use of digital currencies.”
