Taxes & Capital Gains

 

            Income tax and capital gains compliance have always raised questions in the minds of tax payers.  Nobody wants to pay taxes but it’s an unavoidable reality in our everyday lives.  The tracking ability with anonymous virtual currency transactions poses questions for the IRS and related officials.  Unless an individual is blatantly evading tax reporting, often tax payers are unaware of many of the tax rules that could apply to them.  We can take this concept one step further with regards to virtual currency due to its relatively small influence on the overall economy, and no prior established framework for filing. 

 

             Bitcoin users in Germany have been given definitive government tax compliance rules.  These new rules give an incentive for Bitcoin users to hold on to their coins.  “Legally, the purchase and sale of bitcoin is a private sale transaction…The legal requirement is to collect on these transactions only if the period “between buying and selling is no longer than one year.”  The government also declared, "capital gains tax does not apply to mining bitcoins. It only applies to stocks, bonds, etc, that have been purchased with the intention of market speculation. Since mining bitcoins is essentially creating value, normal income tax would be applied.” 1

   

            The US government or IRS have not provided tax payer compliance guidelines for virtual currency users. With Bitcoin spotlighted in the spiked news coverage in 2013, the Government Accountability Office (GAO) issued a report In May of 2013 to the US Senate Committee on Finance.  This report provides some “informal” information that may help Bitcoin users determine if they would need to claim income or capital gains to the IRS.  Link to informal guidelines: http://www.gao.gov/products/GAO-13-516 .  

             AccountingToday, an online news source provider for the tax and accounting community, outlines some of the issues the IRS faces with the      time and cost associated with establishing guidelines for virtual currencies. 

            The IRS has not provided taxpayers with information specific to virtual       currencies because of other priorities, resource constraints and the need       to consider the use of these recently-developed currencies, according to     IRS officials. By not issuing guidance, the IRS may be missing an             opportunity to address the tax compliance risks of virtual currency, the       GAO pointed out.

            Given the uncertain extent of noncompliance with virtual currency transactions, formal guidance, such as regulations, may not be warranted,       the GAO acknowledged. According to IRS officials, formal guidance       requires extensive review, which adds to development time and cost.

            However, the IRS may be able to develop timelier and less costly     informal guidance, which, according to IRS officials, requires less extensive review and can be based on other existing guidance. An       example is the information IRS provides to taxpayers on its Web site on     the tax consequences of virtual economy transactions. 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.”

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