Taxpayer Advocate Service: Your Voice at the IRS

National Taxpayer Advocate Annual Report to Congress

Digital Currency Users Need Guidance

Bitcoin

The use of digital currencies, such as bitcoin, is growing. Between July and December, 2013, bitcoin usage increased by over 75% – from about 1,700 transactions per hour to over 3,000. In the same period, the market value of bitcoins in circulation rose from about $1.1 billion to $12.6 billion. However, the IRS has yet to issue specific guidance addressing the tax treatment or reporting requirements applicable to digital currency transactions. Unanswered questions may include:

  1. When will receiving or using digital currency trigger gains and losses?
  2. When will these gains and losses be taxed as ordinary income or capital gains?
  3. What information reporting, withholding, backup withholding, and recordkeeping requirements apply to digital currency transactions?
  4. When should digital currency holdings be reported on a Report of Foreign Bank and Financial Accounts (FBAR), or Form 8938, Statement of Specified Foreign Financial Assets?

Taxpayers are speculating on the Internet about the answers to these questions. Some of this speculation is incorrect, incomplete, or misleading. It is the government’s responsibility to inform taxpayers about the rules they are required to follow. The IRS should issue guidance that addresses the tax treatment and information reporting required in connection with digital currency transactions, including answers to the basic questions listed above.

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IRS-issued guidance would promote tax compliance, particularly among those who want to comply. Moreover, it would eliminate the ambiguity that may encourage some digital currency users to avoid taxation and information reporting.