IRS To Tax ‘Virtual Currencies’

A new report from the Government Accountability Office (GAO) warns that the Internal Revenue Service should do more to warn taxpayers that they could have some tax liability over their holdings in Internet-based “virtual currencies” like Linden Dollars or Bitcoins.

On May 15, the GAO released a report ordered by the Senate Committee on Finance entitled, “Virtual Economies and Currencies.”

“Transactions within virtual economies or using virtual currencies could produce taxable income in various ways, depending on the facts and circumstances of each transaction,” the report warns.

The GAO points out that online currencies that exist only within a certain program–like the “cash” used to buy weapons and items in video games–are not taxable if those currencies exist solely within their lone environment. But other online, “virtual currencies” are a bit less “virtual” in that they can be traded offline and used to purchase real things or can even be converted to U.S. dollars using various third party trading systems.

The latter, the GAO report states, could “pose various tax compliance risks.”

But there might be other worries in store for virtual currency users, things that are worse than merely paying taxes on the income, real or imagined, of virtual currencies. That worry is real-life crime.

In the same week in May that the GAO released its report, the Department of Homeland Security shut down a virtual currency trading service called Mt. Gox to prevent its trading in Bitcoins.

On May 14, DHS cut off links between the currency trading service Dwolla and Mt. Gox and put an end to the latter’s trading in Bitcoins. DHS even froze Mt. Gox’ assets. The reason DHS made this move is to prevent international drug dealers from doing business in Bitcoins because the online currency is often later turned into real-world currencies, including U.S. dollars.

Using a “confidential informant” DHS explained how Mt. Gox and Bitcoins are used for criminal purposes.

Mt. Gox acts as a digital currency exchange where customers open accounts and fund the respective accounts with fiat currency, which is then exchanged into crypto-currency by Mt. Gox; the crypto-currency is known as bitcoin. Fiat currency simply refers to any money that a government has declared to be legal tender. The exchange is bidirectional and allows customers to also exchange bitcoins back into fiat currency, and then withdraw those funds. The exchange of fiat currency and bitcoins incurs a floating rate fee charged by Mt. Gox and is determined by the customer’s aggregate amount of funds exchanged on a monthly basis.

For years virtual currencies have been sold as a new world order, currencies that are above the normal world of laws, taxes, and national borders. But it appears that with the IRS looking at ways to tax them and security agencies looking for ways to stop terrorists and drug dealers from profiting from them, that notion that virtual currencies are above the law is no longer as axiomatic as proponents have claimed.

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  • JWH

    Beyond the drug dealer connection, one issue (IMO) with the virtual currencies is that they’re essentially an investment. A person might buy, say, $500 of Bitcoins, watch their value rise, then sell them when they’re worth, say, $2500.* The merits of a capital gains tax aside, it strikes me that if one is to tax the capital gains from a stock portfolio, then one must also tax the gains from a Bitcoin investment.

    * Note: The Bitcoin market has been volatile and even went through something of a bubble, so this is not out of the realm of possibility.

  • jim_m

    Getting rid of the IRS is not enough. We need to remove these people from society. The IRS budget would be well spent on building prisons to house its workers.

    • Commander_Chico

      That’s a bit much for a bunch of civil servants. Especially from someone who’s said he works in the heavily tax-supported health care business. Biting the hand, etc.

      Did you have to pay a penalty, jim? Failure to file, or underpayment?

      • jim_m

        Heavily tax supported? Not anywhere I have worked. If you think that the health care industry is making huge profits off of government reimbursement that fails to pay as much as 50 cents on the dollar you are sadly mistaken.

        Even Michelle obama’s former employer University of Chicago Medical Center dropped its trauma center status because it could not afford the losses it sustained by having to treat Medicaid patients that came in through the ER.

        More BS from Mr know it all Chico. I suppose you were at some point Deputy Secretary of HHS in between your service on the UN Security Council and the Joint Chiefs.

        And no, I do not think it excessive for people who are attempting to take our civil rights away. And certainly the threat of criminal penalty for people who abuse government office should be made very real to these people. Sovereign immunity needs to be done away with for the federal government bureaucrat.

        • Commander_Chico

          It’s not a matter of “profits.” I’m sure you could raise profits by pricing health care in a way that would leave people dying in the street.

          Pricing in the health care system is bullshit anyways – $50 tongue depressors and $5 aspirins, along with the AMA’s restrictive guild.

          it’s a matter of how big the health care sector is, how many people like you are employed. Medicare, Medicaid and other government health care like TriCare, IHS, etc account for a large percentage of US health care spending. That money is collected by the IRS.

          Whatever you do in the health care system, without government spending chances are you’d be doing less of it. Unless you’re doing exclusive services for boutique. bespoke health care for the rich, you might not even have a job.

          • jim_m

            Most government “spending” on healthcare is not on actual healthcare but is for government bureaucracy.

            HealthCare spending is 1/6th of the economy. Medicare, Medicaid, et al account for less than 25% of all healthcare spending. According to the CBO, BCBS and industry groups ~12% of private health insurance costs goes to administrative overhead. Harvard did a study that showed that in socialized medicine countries like Canada healthcare spending had an overhead of 31%. Other studies put the administrative cost of Medicare and Medicaid at around 24%, fully double the cost of private insurance and obamacare is increasing those costs, not decreasing them. It isn’t clear that these estimates fully account for the cost of tax collection either.

            Do the math. Government spending is more overhead. We get better value for our money when the market takes care of the insurance and not the government.

            Yes, without government spending there would be less healthcare delivered, but not as much of a reduction as you think. Already many physicians refuse to see Medicare and Medicaid patients.

            The vast majority of healthcare in this country is paid for by private insurance.Take a break from drinking the leftist kool aid. Government pays for very little healthcare and pays very little for the healthcare it covers.

            Getting government out of healthcare would make things cheaper, more accessible and more efficient. But that isn’t the goal of the left. The left wants to run healthcare through the IRS (literally) and we already see that this means that you get healthcare based on your political and religious beliefs. The left wants to use healthcare as a political weapon against the public. Anyone who still supports obamacare is for a totalitarian and criminal government.

          • Commander_Chico

            So you concede that about 1 in 4 health care dollars is government money.

            OK. What about the military? Should they be privatized, too? They’re paid by the IRS.

          • warnertoddhuston

            I always love when people foolishly try to argue against privatization by stampeding to the military and asking if it should be privatized. Uh, the military is one of the FEW things that shouldn’t be privatized because…. IT’S IN THE CONSTITUTION! It’s one of the few damn things the government does that is wholly legitimately in the federal purview because it’s one of the few things actually mentioned in the Constitution! DUH!

          • jim_m

            No. Not at all. I said that we spend 1 in 4 dollars from the government. But of those 1 in 4 dollars only 75% of THOSE dollars are actually spent on healthcare. So in reality only 1 out of every $5.50 is spent by the government.

            The point is that if you got government out of healthcare, healthcare would be cheaper and more efficient. You;re a fucking moron and can’t figure that out and your solution is to make more of healthcare paid for by the government because you are in favor of government control over everyone’s lives and especially in favor of political hacks deciding who gets treated and who does not.

            The IRS is going to implement obamacare. Does the IRS run the pentagon? Nope. But the IRS is scheduled to hire 16,500 new agents for obamacare alone. How many dedicated agents does the IRS have for military spending?

          • There is no “government money”; only monies taken from taxpayers.

          • jim_m

            For Comrade Chico, all money belongs to the government. Taxation is where the government tells us what they will allow us to have. That’s why tax cuts “cost” the government money because Chico believes that tax cuts are where the government gives us more of the government’s money.

          • If the United States Government brewed and bottled beer it would fall somewhere between Coors and Ranier and would run $20.00/sixpack.

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