Auditors and IRS Pan Tax Regulations for Bitcoins

The agency lacks time and money for formal rules on collecting revenue for income earned through the virtual currency.

Federal auditors are recommending that the Internal Revenue Service not issue regulations for taxpayers on filing returns for the money earned through the exchange of virtual currencies, such as Bitcoins. 

The tax agency has neither the money nor the time to craft compliance rules for the emerging market, according to a new report from the Government Accountability Office.

Bitcoins -- which are not government-backed -- can be traded for real products and services or traditional currency, including dollars. 

GAO officials acknowledged the government might be missing out on tax revenue as a result of not publishing Bitcoin-specific rules, but it is unclear how much. “Given the uncertain extent of noncompliance with virtual currency transactions, formal guidance, such as regulations, may not be warranted," the auditors concluded. 

The tax agency has not provided taxpayers with information on virtual currencies “because of other priorities, resource constraints, and the need to consider the use of these recently-developed currencies," GAO officials explained.

Instead, for the time being, the IRS has agreed to post information on its websites linking to existing guidelines on bartering, gambling and hobby income, agency officials wrote in a May 3 letter responding to a draft report.

Steven Miller, IRS deputy commissioner for services and enforcement, stated: The IRS "is aware of the potential tax compliance risks posed by off-shore and anonymous electronic payment systems, and we are working to address these risks.”

Discussions with other federal agencies, new training for IRS professionals, and the creation of questionnaires for agents examining returns are under way, Miller added. 

Bitcoin trades, which are hard to trace online, have come under scrutiny at other regulatory agencies, such as the Financial Crimes Enforcement Network, which looks for signs of money-laundering. 

(Image via Flickr user zcopley)

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