The report correctly notes that virtual currency transactions are similar to cash or barter transactions. There are no third parties involved whose responsibility it is to report the transaction and transactions of this sort making “underreporting, mischaracterization, and evasion” much easier.

This does signal that the IRS will be keeping a closer eye on the Bitcoin economy, but there is nothing terribly surprising here; the IRS wants a share of your income…however you earn it.

The Report is 27 pages long and can be read here.

Below are a few excerpts.

“A virtual currency is, generally, a digital unit of exchange that is not backed by a government issued legal tender. “ (p7)

 “IRS is responsible for ensuring taxpayer compliance for all economic areas, including virtual economies and currencies. One mechanism that assists IRS in enforcing tax laws is information reporting, through which third parties report to IRS and taxpayers on certain taxpayer transactions.“ p13

“Transactions within virtual economies or using virtual currencies could produce taxable income in a number of ways depending on their specific facts and circumstances. U.S. tax laws and regulations generally require taxpayers to report and pay taxes on all income, regardless of the source from which the income was derived;  there are no additional rules specific to virtual currencies or economies.  For example, similar to cash transactions, there are no third -party reporting requirements specific to virtual economy or currency transactions, as there are with some other types of electronic funds transactions, such as with transactions conducted through third-party payment networks. Taxpayers are required to account for any taxable income, including income that is not subject to third -party information reporting.“  (p14)

“Bill is a bitcoin miner. He successfully mines 25 bitcoins. Bill may have earned taxable income from his mining activities.

Carol makes t-shirts and sells them over the Internet. She sells a t-shirt to Bill, who pays her with bitcoins. Carol may have earned taxable income from the sale of the t-shirt.” (P16)

“IRS, tax experts, academics, and others have identified various tax compliance risks associated with virtual economies and currencies, including underreporting, mischaracterization, and evasion. These risks are not unique to virtual economies and currencies, as they also exist for other types of transactions, such as cash transactions, where there are not always clear records or third-party tracking and reporting of transactions.” (P16)

Further analysis is available here from Forbes contributor Robert W. Wood.

Forbes’ Robert W. Wood explains that this could have serious consequences for Americans living abroad.

“FATCA—the Foreign Account Tax Compliance Act—generally takes effect in 2013 and the IRS will start penalizing foreign banks in 2014 for failing to comply. The law was enacted in 2010 but remains in the ramp-up phase. Yet foreign banks and governments are on board and more of the law is being applied right now.”

“FATCA requires foreign banks to report U.S. account holders to the IRS. After identifying them, institutions must impose a 30% tax on payments or transfers to any who refuse to step up. Foreign financial institutions (FFIs) must file IRS reports by September 30, 2014.”

“At first, FFIs must report account numbers, balances, names, addresses, and U.S. taxpayer identification numbers. For U.S.-owned foreign entities, they must report the name, address, and U.S. TIN of each substantial U.S. owner.”

“U.S. persons living abroad may feel caught in the crosshairs of the U.S. war on undisclosed foreign accounts and income.”

“Many Americans already can’t open legitimate new accounts abroad and face closure of old ones. Mortgages are being denied or called, and the squeeze is getting worse. American Citizens Abroad complains that expatriates face an impossible position merely based on their nationality.”

“On top of annual FBAR TD F 90-22.1 filings for foreign accounts and reporting worldwide income on your taxes, FATCA’s Section 6038D requires U.S. taxpayers to report foreign accounts and assets with an aggregate value exceeding $50,000. Required reporting includes:

• Any financial account maintained by an FFI;
• Any stock or security issued by a non-U.S. person;
• Any financial interest or contract held for investment that has a non-U.S. issuer or counterparty; and
• Any interest in a foreign entity. That means taxpayers who purchase foreign real estate through an entity are covered by FATCA as well.”

The article can be read in its entirety here.