A lack of tax guidance on bitcoin is leading to confusion and misperceptions among US businesses and could even encourage tax avoidance, warned a Treasury-appointed spokesperson today.
Nina Olson, the Taxpayer Advocate, put pressure on the IRS in her annual report to U.S. Congress. Olson is the head of the Taxpayer Advocate Service, an independent organization within the IRS that represents taxpayers.
Olson singled out a lack of IRS guidance around bitcoin and other virtual currencies as a particular issue of concern in this year’s report, listing it in the “most serious problems” section.
“Legitimate businesses – those who want to comply with the rules and do not want to be associated with tax invaders or criminal enterprises – have urged the government to issue the rules about the tax consequences of digital currency transactions,” Olson said in the report.
The National Taxpayer Advocate had already asked for tax guidance in 2008. The IRS had begun assessing tax compliance risks from virtual economies in 2007, and published information on its website on the tax implications of virtual economy transactions in 2009. This advice didn’t specifically cover digital currencies, however.
A gap in specific guidance from the IRS on bitcoin and other digital currency has left individuals and businesses scouring the Internet for often inaccurate information, Olson warned, adding that many would be surprised to hear that capital gains could be imposed on bitcoins.
Several pressing issues
Olson identified several issues needing firm guidance from the IRS. Existing tax forms require US citizens and residents to report foreign accounts holding more than $10,000, for example. It is unclear whether this includes bitcoin.
Coinbase, which provides payment processing services for vendors, failed to respond immediately to questions about its compliance with that form, entitled Report of Foreign Bank and Financial Accounts (FBAR), but rival payment processor BitPay confirmed that it did list compliance with the form in its merchant terms and conditions.
Olsen also highlighted state tax law as a potential future challenge. Several state-level bills would force out-of-state vendors to collect sales tax on sales to in-state residents. “These bills only provide full sales tax collection when the seller knows the purchaser’s address,” the report said. That is naturally a problem for bitcoin-enabled vendors, who may not have that information. “For all these reasons, bitcoins could become more popular as a result of this legislation,” said Olson.
Senator Tom Carper, who has been outspoken about bitcoin’s potential as recently as this week, praised Olson’s comments on bitcoin and tax guidance.
“I believe that the vast majority of these consumers want to play by the rules and do the right thing when it comes to complying with federal tax law as it pertains to digital currencies, but they can’t do that until the Internal Revenue Service does its job and issues the rules of the road that all must abide by,” he said.
“I am hopeful that the new Internal Revenue Service Commissioner, John Koskinen, takes these recommendations to heart and acts expeditiously to provide thoughtful guidance to taxpayers regarding the use of digital currencies.”
This isn’t the first time that the IRS has been accused of dragging its feet on digital currency taxation guidance. Earlier this year, the Government Accountability Office (GAO) published a report recommending informal guidance to at least give the public some information about how to report bitcoin income. At the time, the GAO’s director of tax issues James White told CoinDesk that the IRS was “running to keep up”.
The IRS has so far given no specific date for further guidance on the taxation of digital currencies, but has indicated that it is working on the topic.
Tax image via Shutterstock