Taxes and Virtual Currency

Virtual Economies and Currencies: Additional IRS Guidance Could Reduce Tax Compliance Risks, GAO-13-516, May 2013

There has been a lot of mention in recent news stories about Bitcoin. Reuters reported this week that the Treasury Department's financial crimes group (FinCEN) hosted a meeting with the Bitcoin Foundation ("Regulators, Bitcoin group discuss virtual currency," 8/26/13). USA Today reports that the Senate Homeland Security and Government Affairs Committee began investigating virtual currency a few months back and recently sent letters to some federal agencies to learn how they regulate such currencies ("Government eyes regulation of 'Bitcoins'" (8/26/13). There have also been recent stories about virtual currencies and Ponzi schemes and money laundering, which obviously leave negative connotations about these currencies although some, like the Bitcoin, are being used for legitimate business transactions.

What is "Bitcoin"? It is a means for transacting business that has its foundation in software code and enough people willing to use it as a medium of exchange. A March 2013 release from FinCEN stated the following regarding virtual currencies (such as Bitcoin): "In contrast to real currency, "virtual" currency is a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency. In particular, virtual currency does not have legal tender status in any jurisdiction."

There are a few well known virtual currencies including the Linden dollar in Second Life and Amazon coins. Virtual currencies vary in terms of where they are usable (only in the online game or website), whether they can be exchanged for real currency, and how they are created or obtained.

In May 2013, the GAO released a report about virtual economies and currencies and the need for guidance from the IRS on when their use may generate tax consequences.It provides a helpful background for understanding

I have a short article - "Real taxes in the virtual economy" (AICPA Tax Insider, 8/15/13) which provides additional background on virtual currencies, the GAO report, other government activities, and some of the tax issues. There are also website references to learn more about bitcoin and other virtual currencies.

How could there be any tax relevance you might ask? Well, what and when is the income tax effect of someone who "mines" Bitcoins? What about the costs they incur in obtaining Bitcoins? (An April 2013 BBC article noted high energy costs of performing the computer calculations needed to obtain new Bitcoins.)   If you use virtual currency to play games or buy and sell virtual goods and services and later convert the virtual currency to cash or other property with a value greater than the amount originally invested, you'll have income.

Please take a look at my article and the GAO report.

What do you think?  Do you or would you use a virtual currency rather than "real" currency?