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Virtual currency and the IRS

Virtual currency and bitcoins are popular subjects on tax blogs. As this involves online transactions, regulations regarding this area are relatively new. It is also a difficult area to regulate because individuals involved in bitcoin transactions are usually anonymous. Finally, the amount of virtual currency used in transactions usually is unreported by third parties. Yet unreported income from virtual currency transactions could possibly trigger an IRS audit.

The 2014 guidelines by the IRS defined virtual currencies as property. The IRS also put together a team to share information regarding virtual currency transactions across the agency. But according to the Treasury Inspector General for Tax Administration (TIGTA), "undetected noncompliance" remains a significant problem. Apparently, there is no guideline developed concerning IRS audits or investigations regarding virtual currencies. Therefore, TIGTA is calling for development of a comprehensive strategy.

Though the IRS has so far not taken any actions to address the comments by the TIGTA, there is a possibility of future rule changes. It is unlikely that the IRS will ignore the recommendations made by TIGTA indefinitely. This could also mean that there will at some point be a crackdown on perceived noncompliance. And the rules and guidelines that the IRS eventually formulates regarding investigations and audits will likely be open to interpretation.

Taxpayers may wish to speak with experienced tax counsel when contemplating virtual currency and bitcoin exchanges. These exchanges will continually be complex - especially when it concerns reporting of taxable income. Because of the uncertainty regarding this area of law, legal guidance can prove useful concerning whether transactions will raise red flags with the IRS. Advice regarding interpretation of current rules can prevent costly mistakes from occurring.

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