The IRS doesn't have a tax compliance strategy to address the increasing use of virtual currencies like bitcoin, an inspector general warned in a report released Tuesday.
"It is imperative that the IRS ensures that those who engage in activities using virtual currencies comply with all of their tax obligations," J. Russell George, Treasury Inspector General for Tax Administration, said in a statement.
Bitcoin and other virtual currencies, a new technology that has been gaining purchase, face an uneven patchwork of federal regulation.
Although the IRS issued guidance regarding virtual currencies and established a Virtual Currency Issue Team, the inspector general said, the agency still doesn't have a plan for ensuring that it fulfills its responsibilities related to the currencies. The IG said a plan is needed in part because bitcoin and other such currencies allow for anonymous payments, raising concerns about money laundering, illicit transactions and tax avoidance.
In particular, the watchdog warned, the IRS isn't ready to ensure compliance from businesses subject to the Bank Secrecy Act that are required to report on suspicious activities. The IRS is responsible for making sure that some non-banks comply with the law.
Additionally, it said the IRS needs to help taxpayers calculate and pay their tax obligations for bitcoin.
Because the agency defined bitcoin in 2014 as property rather than currency, users incur taxes when they spend or exchange them. For instance, if someone bought a bitcoin at $300 and then sold it for $700, they would owe capital gains taxes on $400. More confusingly, if they spent 0.004 bitcoin on a cup of coffee that cost $3 in U.S. dollars, they would have to calculate capital gains realized in that transaction.
The IRS needs to find out how to help individuals and businesses figure out how to calculate their tax obligations for those scenarios, the inspector general said. It noted that the Australian Taxation Office ruled that there would be no tax implications for personal transactions under $10,000 Australian
