Bitcoin
is a virtual currency that is accepted around the globe for anything
from a weekend at a bed-and-breakfast to purchasing your favorite book
online. Bitcoin works a lot like dollars in the sense that you earn
Bitcoin by accepting them from other Bitcoin users when you provide a
product or service. But since Bitcoin is an online currency that isn’t
regulated by any centralized banking system, it can be tempting to
believe that you don’t have to report Bitcoin transactions for tax
purposes. In a recent article in Forbes Magazine, the tax implications of accepting and using Bitcoin were explained.
Even
though the IRS currently does not have any regulations for individual taxpayers specific to the
use of Bitcoin, when you sell a product or service for Bitcoin, you have
earnings and those earnings are considered as taxable income. Bitcoin
transactions closely resemble traditional bartering or trading for goods
and services. Both of these transactions are taxable under current IRS
rules. If you barter $500 worth of dog boarding services for $500 in
house painting services, both parties must claim $500 in taxable income.
The same applies with trades. If you trade your $5,000 car for a $5000
ATV, both parties have conducted taxable transactions.
will the IRS know about Bitcoin transactions? It’s unlikely that they will.
Bitcoin does not require users to register to make purchases and the
company doesn’t issue 1099 forms for transactions. However, the IRS
requires that all income be reported even when a 1099 form has not been
issued. As Bitcoin’s popularity continues to grow, so will the IRS’s
interest in more closely monitoring the transactions that take place
using it.
Although there are no registration regulations
for users of Bitcoin, the federal government has made it clear that it
will hold currency exchanges of all types responsible for complying with
money transfer regulations. Earlier this month, funds of the largest bitcoin exchange, Mt. Gox, were seized as a result of an alleged failure of the company to register as a “money transmitting business” in accordance with 18 U.S. Code 1960.