In an IRS audit today I was amused by all the preliminary questions about income sources. The auditor asked about wage income, 1099 income, interest, dividends, royalties, alimony, child support, law suit settlements & awards, reimbursements, gifts, inheritances, grants, scholarships, life insurance proceeds, tips, etc., etc. But the one thing she failed to ask about was digital currencies, like Bitcoin. And I don’t mention this because I think the auditor missed something or that the client failed to report all his income. He probably wouldn’t even know what Bitcoin is. I mention this to illustrate the fact that the IRS has been slow to recognize digital currencies as income and/or supply guidance as to the specific reporting requirements. But they’re going to have to act on this soon because it is becoming more prevalent:
In the four months between July and December 2013, bitcoin usage has increased by over 75 percent — from about 1,700 transactions per hour to over 3,000. Over the same period, the market value of bitcoins in circulation increased more than ten-fold from about $1.1 billion to $12.6 billion. Over 10,000 businesses reportedly accept payment in bitcoin.
The only guidance (if you can call it that) from the IRS is found on a single web page on irs.gov entitled “Tax Consequences of Virtual World Transactions.” The IRS essentially likens virtual currency to bartering, gambling, and hobby income:
The IRS has provided guidance on the tax treatment of bartering, gambling, business and hobby income – issues that are similar to activities in online gaming worlds.
It’s clearly not the same thing. Legitimate law abiding geeky businesses (and individual geeks) deserve some more guidance from the IRS on this issue.