This is a question that doesn’t have an easy answer. Bitcoin, a virtual currency, has increased in value and become a sort of “digital alternative to gold.” This has drawn more interest from the IRS especially since there are suspiciously few taxpayers reporting these transactions.
The IRS characterizes bitcoin as property rather than currency. This means bitcoin can be analogized to stock. Gains are thus similarly taxed at the long-term capital gains rate.
But as the Wall Street Journal reports this can cause a paperwork nightmare if you routinely use bitcoin to pay your bills. Even paying for a $6 latte with bitcoin becomes a taxable event that requires calculating gains or losses. This is much different from the more streamlined rules applied to foreign-currency holdings.
Companies that allow customers to store bitcoin could issue 1099-B forms similar to what brokerages use to summarize profits from stock transactions. But as the above example illustrates this is a problem, because it’s not easy to track each bitcoin purchase and sale.
An unwieldy standard discourages compliance
The Treasury Inspector General for Tax Administration, the agency that oversees the IRS has stated, “Further guidance is needed to help taxpayers voluntarily comply with their tax obligation.” The IRS response has been that an overhaul of reporting on virtual currency ins't a priority. Digital currency advocates also blame unclear guidance for a lack of reporting.
Coinbase, a San Francisco-based company offers wallet accounts as a way to securely store virtual currency. The IRS alleges that corporate taxpayers are using these currencies to evade taxes and has issued a John Doe summons to the company seeking information on account users.
In our next post, we will discuss how a John Doe summons works and why Coinbase is fighting the request.