Author Archive

No Sales Tax on DFS in New Jersey

October 19th, 2016 No comments

Earlier this month, the New Jersey Division of Taxation issued a ruling that entry fees paid to enter into daily fantasy sports contests are not subject to the State’s sales tax. This is good news for players, as the tax would have been borne by the players.

Of course, rulings from state tax agencies are not binding on all taxpayers. For this letter ruling, the decision is binding only on the Division of Taxation and the operator that actually requested the ruling. The New Jersey Tax Court court could rule differently if the issue was litigated.

One cannot assume other state tax courts or agencies would arrive at the same conclusion. Each state’s sales tax laws (if a state imposes sales tax) are different.

At some point, states (and the IRS) will have to address a related question: whether daily fantasy sports is considered gambling for income tax purposes. I’ve discussed before why the answer to that question is significant.

Categories: DFS, Gambling, New Jersey Tags:

Federal Judge: Offshore Online Gambling Accounts Are Reportable Foreign Financial Accounts

June 6th, 2014 No comments

A federal district court judge in California has ruled that FirePay, PartyPoker, and PokerStars online gambling accounts are subject to the foreign financial account reporting rules.

Ok, so who cares?

Any U.S. taxpayer who has or had offshore online gambling accounts. If a U.S. taxpayer’s total maximum balances in foreign financial accounts exceed $10,000 at any point during a tax year, he must file FinCEN Form 114, formerly known as the FBAR.

In the case United States v. Hom, the defendant had online gambling accounts with PokerStars, PartyPoker, and FirePay in 2006 and 2007. The defendant acknowledged that the aggregate amount of the funds in these accounts exceeded $10,000 in U.S. dollars during 2006 and 2007. But, he contended that they were not foreign financial accounts.

The judge disagreed. Because FirePay, PokerStars, and PartyPoker all functioned as banks, said the court, they fall within the scope of the definition for a reportable account. The judge granted the IRS’s motion to impose against the taxpayer FBAR penalties of $10,000 per account not reported per year.

We’ve discussed this issue before. I said:

1. It is possible Treasury could at some point view offshore online casino accounts as subject to FBAR disclosure, and

2. It is becoming more and more likely the IRS will have access to the records of offshore online casinos if and when offshore online casinos bring their operations to U.S. soil.

That was written two weeks before the Department of Justice seized the U.S. domains of Absolute Poker, Full Tilt Poker, and PokerStars on April 15, 2011.

As for (1):

Our judicial branch is tasked with interpreting the law. Our executive branch, including the Department of Justice, is tasked with enforcing the law. Will the DOJ suddenly allocate resources to penalize taxpayers who didn’t report offshore online gambling accounts because of this one decision?

Perhaps not, unless the violation also involves a serious offense such as tax evasion or it’s simply convenient to. Which brings us to (2):

I had suspected the federal government might obtain access to the records of offshore online gambling companies sometime in the future. Turns out I was correct, just for the wrong reason: Full Tilt Poker and PokerStars agreed to maintain all records relating to its business in the United States in connection with their domain seizures in 2011.

In order to retrieve funds on their offshore online gambling accounts that were frozen by the Department of Justice, some U.S. taxpayers had to provide their social security numbers. It’s clear the government can easily look into whether these U.S. taxpayers with larger balances filed FBARs. The questions remains of whether they will.

As Russ Fox notes, this is one court decision in one district. A federal district court decision is mandatory authority only on some lower specialized courts in that particular district. This case was decided in the Northern District of California. The court is headquartered in San Francisco and covers fifteen northern California counties.

If Mr. Hom appeals to United States Court of Appeals for the Ninth Circuit and the Ninth Circuit affirms the lower court’s decision, then the decision is mandatory authority on all district courts within the Ninth Circuit.

In all districts other than Northern California, the case is merely persuasive authority for now. This means all the other district courts may follow the decision but do not have to.

How should implicated U.S. taxpayers respond to the decision?

As I’ve said before, I don’t see the downside to playing it safe and filing the Form 114 going forward.

For taxpayers with prior years at issue, there are some options to consider. One is by coming forward through the IRS Offshore Voluntary Disclosure Program. This option may not be most appropriate for all taxpayers, as each taxpayer’s particular situation is different. A taxpayer should consult a tax professional to discuss specific facts and circumstances.

We’ll see if Hom decides to appeal or if the DOJ issues a statement on this…

IRS: Mined Bitcoins are Taxable

March 25th, 2014 2 comments

Let’s applaud the Internal Revenue Service for issuing fresh guidance on the agency’s application of the tax law to virtual currencies.

I was nodding along until reaching the discussion of “mining” virtual currency:

When a taxpayer successfully “mines” virtual currency, the fair market value of the virtual currency as of the date of receipt is includible in gross income.

You’ll be taxed upon the creation of bitcoin, says the IRS. Mining bitcoins is a reward in exchange for providing services required to operate the bitcoin payment network.

Taxing fiat currency when received in exchange for providing services is a fundamental principle of U.S. taxation. But here, the IRS has explicitly said that bitcoin is property, and not foreign currency, under the tax code.

If I receive property, such as a car, in exchange for providing legal services, I have to pay tax on the fair market value of the car upon receipt.

But what if I build a car for people to drive? When would I have to pay tax on that? Not until I sell or exchange it.

The sale or exchange moment is formally known as a “realization” event under the tax code. There is no taxable income without a realization event.

There is no realization event when I merely produce a car for resale. And I’d argue that there may be no realization event when I produce bitcoins from mining.

That’s why I think the IRS may have gotten it wrong: Mined bitcoins shouldn’t be taxable until they are traded on an exchange or exchanged for other property or services.

According to, approximately 1,371,425 bitcoins have been mined within the last year. Assume a conservative average exchange rate of $250 per bitcoin over the past year. If all mined bitcoins are subject to U.S. income tax (they’re not), that’s $342 million of potentially taxable income.

A big win for the U.S. Treasury this round.

(Thanks to William Lewis for bringing this to my attention.)

Categories: IRS, Virtual Currency Tags: ,

Full Tilt Money Soon, with a Tax Bill?

January 22nd, 2014 No comments

According to the Poker Player’s Alliance, the Department of Justice has approved the release of $82 million in funds to approximately 30,000 U.S. players who submitted a petition for remission for their Full Tilt Poker funds seized on April 15, 2011. Nearly three years after seizure, the funds (or a portion of) may be finally returned.

Do players have to pay federal and state taxes on the funds received? It depends.

Consider this scenario I described a couple of years ago:

Let’s say 2010 was the first year I played on Full Tilt, initially depositing $100. During the year, I played four “sessions.” I had two winning sessions of $25 and $75, and two losing sessions of $30 and $60. Throughout the year, I successfully withdrew $50 from my Full Tilt account. On my 2010 tax return, I claimed $100 in gambling winnings and $90 in gambling losses. Note that the $50 withdrawal has no impact on my tax consequences for the 2010 year.

At the beginning of 2011, my Full Tilt balance was $60 (initial deposit of $100, less $50 withdrawal, plus net winnings of $10). Before Black Friday, I played another four sessions. I had two winning sessions of $60 and $70, and two losing sessions of $30 and $50. I also withdrew another $50 before Black Friday, so my frozen account balance on Black Friday was $60 ($60 at the beginning of the year, less $50 withdrawal, plus $50 net winnings).

For the 2011 tax year, are any of my gambling winnings or losses reportable? As I said above, any gambling winnings that were successfully withdrawn would be considered taxable income because they were actually received. In my situation, however, that wasn’t the case. Why?

The $50 withdrawal in 2011 was not attributable to the 2011 gambling activity, but to the $100 deposit I made in 2010. To arrive at this result, I applied an accounting method called “First-in first-out” (FIFO), which is often used to determine the cost basis of securities sold. Before making the 2011 withdrawal, I had recovered only $50 of the $100 initial deposit made in 2010. Since the 2011 withdrawal was less than or equal to the remaining portion of the 2010 deposit, none of the $50 withdrawn in 2011 was attributable to the gambling activity in 2011. Therefore, due to a lack of constructive receipt of the 2011 gambling winnings, I would not report any gambling winnings or losses in 2011 attributable to Full Tilt. In addition, I would not report the $60 frozen balance as a loss because it was not considered permanent as of the close of the 2011 tax year.

I must note that there is no direct legal precedent that explicitly says to use FIFO when ascertaining the tax consequences in the context of Black Friday. Considering FIFO is sometimes used for computing the gain on securities purchased at different times, an activity arguably similar to gambling activity, it seems like a reasonable method to me. Some may say there’s no difference between gambling and investing in securities. In both cases, one deposits a specified sum and at some future time either cashes out or loses the entire investment once the sum becomes worthless.

Now suppose I receive from the claims administrator, Garden City Group, only $50 of the $60 that was in my Full Tilt account on April 14, 2011. In 2011, I didn’t claim any taxable gambling winnings or losses on Full Tilt Poker because the company didn’t have the money to pay the balances in player’s accounts. During the year, I had winning sessions totaling $130, and losing sessions totaling $80, for a net of $50.

$10 of the $50 received from the claims administrator should be attributed to the initial 2011 balance in the account; taxes were paid on those winnings in 2010. The remaining $40 is attributable to the $50 “net” winnings from the year, and taxable in 2014.

What about the remaining $10 I am never going to receive? Here are two options to consider for the 2014 tax year:

  1. Reduce the gross gambling winnings from $130 to $120, resulting in net gambling winnings of $40 for 2011, instead of the $50 on the site. The theory is that since I never constructively (or actually) received the $10, then it was never income to me.
  2. Claim the $50 net winnings, but also claim the $10 not received as a casualty loss.

For recreational gamblers, there is a $100 deductible for casualty losses, and a casualty loss is deductible only to the extent it exceeds 10% of the taxpayer’s adjusted gross income.

So I couldn’t claim my $10 as a casualty loss since it is less than the $100 deductible.

Professional gamblers, however, may be able to claim a casualty loss on Schedule C, and avoid the casualty loss limitations that recreational gamblers face. If I were a professional, then I could possibly claim the full $10 as a casualty loss.

Garden City Group is expected to release additional details here in less than twenty-four hours, at which point we can further assess the implications.

One question I’m wondering above all: Will Garden City Group issue a 1099-MISC or another tax form in connection with the return of funds to players? If so, I hope GCG does not simply report on the form the total amount received.

As seen in the scenario above, the amount received could include some combination of both winnings and deposits. Of course, only the former is taxable income.

Disclaimer: This blog discusses tax concepts generally, and does not address anyone’s specific tax situation. Consult a tax professional to discuss particular facts and circumstances.

Withholding Massachusetts Gambling Winnings: Searching for a Better Solution

January 20th, 2014 No comments

Over the weekend the Boston Globe ran a story about an interpretation of Massachusetts law requiring the state’s casinos to withhold and report a patron’s gambling winnings of $600 or more.

The law would capture far more than the corresponding withholding and reporting rules for gambling winnings under federal law. The Internal Revenue Code requires informational reporting for slot machine winnings of at least $1,200 or more and for poker tournament winnings of more than $5,000. There are no reporting requirements for table games such as blackjack, unless the player wins more than $600 and the odds are no better than 300-to-1.

Here’s the law at issue:

Every person, including the United States, the commonwealth or any other state, or any political subdivision or instrumentality of the foregoing, making any payment of lottery or wagering winnings which are subject to tax under chapter 62 and which are subject to withholding under section 3402 of the Internal Revenue Code, without the exception for slot machines, keno and bingo played at licensed casinos in subsections (q)(5) and (r) of said section 3402 of the Internal Revenue Code, shall deduct and withhold from such payment an amount equal to 5 percent of such payment, except that such withholding for purposes of this chapter shall apply to payments of winnings of $600 or greater notwithstanding any contrary provision of the Internal Revenue Code.

In other words, the law requires five percent withholding for state income tax on all winnings of $600 or more in MA casinos. Read more in the Massachusetts Department of Revenue Technical Information Release 13-4.

With Massachusetts in the process of determining casino licensees, prospective operators are making a fuss. There will be more paperwork to deal with. More significantly, higher stakes players may be less inclined to gamble at MA casinos, because a lot of their winnings would be subject to the reporting and withholding.

This possibly slight shift from the status quo that is unfavorable to the industry demonstrates a higher need to completely overhaul the reporting and withholding rules for gambling winnings. There has to be a more effective method that makes the government, operators, and players all happy.

I’ve discussed before a federal bill that included tax reporting and withholding rules for internet gambling winnings:

H.R. 2230, Internet Gambling Regulation and Tax Enforcement Act of 2011, for example, sought to require “Internet gambling licensees” to report to the IRS, among other things, the “net Internet gambling winnings” for the calendar year of each person placing a bet or wager with the licensee. Such a requirement would maximize the reporting to the IRS. But would it be prohibitively costly for iGaming operators to not only document but also report the net winnings of all persons placing wagers, including nominal amounts (e.g. less than $100)?

Players are happy here, because their losses are built into the amount reported to the tax authorities. There is no issue of substantiating gambling losses, which is a big problem for taxpayers at brick and mortar casinos.

Issuing annual tax forms to all patrons with winnings at brick and mortar casinos is not similarly practical. Or is it?

The IRS and casinos could establish a streamlined process for first-time patrons to provide tax information. Once a patron is in the system, all the casino must do is keep track of a patron’s winnings and losses, which can be done upon issuing and retrieving chips, and then report and withhold accordingly. It’s not quite that simple, but it’s a starting point.

As the possibility—however unlikely—of federal legislation for online gambling remains, an overhaul of the reporting and withholding rules should be kept in mind.

Gambling Loss Deduction Removed from Kansas Tax Code Beginning in 2014

July 29th, 2013 10 comments

Kansas is home to three land-based casinos as well as five Indian-owned casinos. Hosting eight profitable casinos in a state of less than 2.9 million people, the State should not want to discourage its residents from participating in the entertainment.

At least that’s what common sense tells me.

Well, the 2013 legislative session in Kansas appeared to lack some common sense when deciding to remove the gambling loss deduction from the state’s personal income tax beginning in 2014, as reported by the Topeka Capital-Journal.

We know the reason for the change. States are hungry for revenue. Removing a so-called “subsidy” for an entertainment activity is an easy political sell.

Regular readers of this blog know the implications. A taxpayer with gambling winnings in Kansas will have to pay the State personal income tax on gross winnings, and cannot even partially offset the winnings via a gambling loss deduction. The result is paying taxes on “phantom” income.

The article mentions that no one came forward in opposition to defend the gambling loss deduction. I’m surprised the local casino lobbyists did not make any fuss.

The initial impact won’t be felt until April 2015, when taxpayers in Kansas have a balance due on their 2014 Kansas tax returns due to gambling winnings. All it takes is one unhappy taxpayer to make a large fuss about it. That’s when Kansans could be tempted to travel outside the state to gamble or turn to other forms of entertainment.

Online Poker Tournaments Now Taxable in Nevada

July 28th, 2013 2 comments

Back in February, the Las Vegas Review-Journal reported that the Nevada Gaming Control Board introduced a bill to tax online poker tournaments. Last month, Governor Brian Sandoval signed Senate Bill 9 into law.

Control Board Chairman A.G. Burnett had noted that in-person poker tournaments are not taxed in Nevada because of the significant costs incurred by the hosts to run these promotional events. Online tournaments, however, do not require the same expenses, such as utilities, floor space rental fees, and food and beverages.

Senate Bill 9 amended, among other things, Nevada Revised Statutes Chapter 463.0161(1) (amendments in bold italics):

“Gross revenue” means the total of all:
(a) Cash received as winnings;
(b) Cash received in payment for credit extended by a licensee to a patron for purposes of gaming; and
(c) Compensation received for conducting any game, or any
contest or tournament in conjunction with interactive gaming, in
which the licensee is not party to a wager,
¬ less the total of all cash paid out as losses to patrons, those amounts paid to fund periodic payments and any other items made deductible as losses by NRS 463.3715. For the purposes of this section, cash or the value of noncash prizes awarded to patrons in a contest or tournament are not losses, except that losses in a contest or tournament conducted in conjunction with an inter-casino linked system or interactive gaming may be deducted to the extent of the compensation received for the right to participate in that contest or tournament.

To be clear, this amendment does not make a player’s winnings from online poker tournaments subject to personal income tax in Nevada. (Nevada does not have a personal income tax.) Rather, an interactive gaming operator’s cut from online poker tournaments is now included as part of the 6.75 percent tax imposed on gross gaming revenue in Nevada.

This amendment has not yet been updated on the Nevada Legislature’s website.

Ohio Tax Man Giveth, then Taketh from Gamblers

July 11th, 2013 1 comment

On June 30, 2013, Ohio Governor John Kasich signed into law Amended Substitute House Bill Number 59. The 3,747 page bill sets forth the Buckeye State’s 2014-15 fiscal year budget.

But that’s not all. Tucked into the bill is the following:

Sec. 5747.01….

As used in this chapter:

(A) “Adjusted gross income” or “Ohio adjusted gross income” means federal adjusted gross income, as defined and used in the Internal Revenue Code, adjusted as provided in this section:

(29) Deduct, to the extent not otherwise deducted or excluded in computing federal or Ohio adjusted gross income for the taxable year, any loss from wagering transactions that is allowed as an itemized deduction under section 165 of the Internal Revenue Code and that the taxpayer deducted in computing federal taxable income.

Gambling losses are no longer deductible as an itemized deduction for purposes of the Ohio income tax, effective immediately.

Gambling losses became deductible under Ohio tax law beginning January 1, 2013, as part of legislation expanding commercial gambling in Ohio.

I located one remark after a brief search for the purpose behind the repeal, in an article quoting a GOP budget fact sheet: “Why should Ohioans subsidize the risky behaviors and bad luck of others?”

I wasn’t fully satisfied, so I kept searching, and found this 2010 Columbus Dispatch op-ed that details the circumstances arising to allowing the deduction in the first place. Legislators have since been convinced otherwise, apparently.

From my reading, the repeal is retroactive. In other words, gambling losses are not deducible in Ohio in 2013 for any part of the tax year.

Ohio rejoins the list of other “bad” gambling states that do not permit gambling losses as an itemized deduction at all for income tax purposes:

  • Connecticut
  • Illinois
  • Indiana
  • Massachusetts
  • Michigan
  • West Virginia
  • Wisconsin

This change in the law does not impact professional gamblers in Ohio, of course. Professionals may deduct gambling losses up to the extent of gambling winnings as a trade or business expense.

Nonresident Gamblers Take a Step Closer to Equality

July 9th, 2013 No comments

Compared to U.S. resident gamblers, nonresident gamblers have had it far worse: Gambling losses are not deductible at all unless connected to a trade or business. Also, games like poker and slots are subject to thirty-percent withholding on a per-bet basis, as opposed to a per-session basis.

Until today, that is.

The District of Columbia Court of Appeals has ruled in Park v. Commissioner that a nonresident gambler may calculate gambling winnings or losses on a per-session basis.

To elucidate the practical significance of this holding, the court explained the tax outcomes when applying each method:

Consider two people. The first, a U.S. citizen, walks into a casino and sits down to play slots. The player first wins $100 but then loses the $100 before leaving the casino for the night. In that hypothetical, the U.S. citizen would have $0 in income to report because the IRS interprets the applicable provision of the Tax Code to cover only gains measured over a session of gambling.

The second person, a non-resident alien, also wins $100 and then loses $100. The non-resident alien is in the same financial situation as our U.S. friend. But according to the IRS, the non-resident alien has $100 in income to report (the $100 he won in the initial bet) because the IRS interprets the applicable provision to require non-resident aliens to pay taxes on gains from each bet.

Section 165(d) of the Internal Revenue Code states that a U.S. resident taxpayer may deduct losses from wagering transactions only to the extent of gains from such transactions. Section 871(a)(1)(A) requires nonresident taxpayers to include in income, among other things, “gains” received from sources in the United States.

The IRS has held the view that “gains” under 165(d) may be calculated over a series of separate plays or wagers. The IRS demonstrated some common sense when stating in 2008 that “fluctuating wins and losses left in play are not accessions to wealth until the taxpayer redeems her tokens and can definitively calculate” the amount realized.

The IRS demonstrated an equivalent lack of common sense interpreting “gains” under section 871 to mean a per-bet approach for gambling. In Park, the IRS argued that because losses aren’t deductible, then all winning bets are taxable.

This logic is backwards: We need to figure out how to calculate winnings and losses first, the court noted.

The taxpayer, Sang Park, played the slot machines. A lot. His case has been remanded to the U.S. Tax Court for the parties to calculate his proper tax liability.

For a summary of the U.S. Tax Court’s opinion that was reversed in part by the D.C. Court of Appeals, check out this post from Russ Fox. If Park’s gambling records are as poor as the Tax Court opinion indicates, he may not fare any better on remand.

Are there any other significant implications from the appellate court’s holding?

In general, payers of gambling winnings to nonresidents are required to withhold 30% of the winnings and issue the payee a Form 1042-S (exception: proceeds from a wager placed in blackjack, baccarat, craps, roulette, or big-6 wheel are not amounts subject to reporting).

Based on the IRS position in Park, theoretically U.S. casino operators should have been withholding (if appropriate) 30% on any winning bet subject to 1042-S reporting (such as slot machines and poker). As the decision notes, this reporting does not necessarily economically reflect the player’s gains from gambling per session.

Park essentially requires U.S. casino operators to make the Form 1042-S reporting and withholding determinations for slot machine play when the nonresident player seeks to cash out tokens or redeem a ticket.

Although this is how U.S. casino operators are also supposed to approach reporting and withholding determinations for slot machine play by U.S. residents, I believe there is inconsistent application of this rule. I’ve heard casinos issuing Form W-2Gs to U.S. residents when their slot machine pull results in a win exceeding $1,200. If a casino has been issuing W-2Gs on a per-bet basis in some situations now, I question whether Park would impact its approach for either U.S. residents or nonresidents.

Unfortunately, the decision does not attempt to further define what a gaming “session” means beyond slot machine play. There is little court precedent for what a gambling “session” is for other games, such as poker. In any event, since this case was about slot machine play, such interpretation would likely be considered dicta.

Nevertheless, the case is a victory for nonresident gamblers. Their treatment just became a bit more similar to resident gamblers for tax purposes.

Case: Park v. Commissioner, No. 12-1058 (D.C. Ct. App. 2013).

GAO: Bitcoin Presents Tax Compliance Risks

June 27th, 2013 4 comments

Last month, the U.S. Government Accountability Office (GAO) issued a report to the U.S. Senate Committee on Finance titled Virtual Economies and Currencies: Additional IRS Guidance Could Reduce Tax Compliance Risks.

I first learned of the report in a piece from Accounting Today. Before going into the GAO report, though, I must comment on how the title to the Accounting Today piece, “IRS Could Begin Taxing Bitcoin and Other Virtual Currencies,” is misleading.

The Internal Revenue Service does not make tax laws. Instead, it enforces them, and promulgates regulations and issues guidance based on interpretations of the Internal Revenue Code. In fact, even the GAO report notes that “IRS must implement the laws Congress enacts through detailed guidance.”

So we shouldn’t say the IRS may decide whether or not to tax Bitcoin. Either transactions involving Bitcoin are taxable under the Internal Revenue Code or they are not.

Of course, the IRS can issue guidance on how it will treat various types of Bitcoin transactions under the IRC. Perhaps the title of the Accounting Today piece meant to convey that the IRS may look to issue such guidance. Even if we see IRS guidance, it doesn’t mean the IRS view is absolute, of course, as it can be challenged in court.

Back to the GAO report. It emphasizes two points in particular several times:

  1. Transactions involving virtual currencies may be taxable.
  2. The likelihood of taxpayer noncompliance regarding such transactions is high because of the lack of guidance on these issues.

The report defines virtual currency as a digital unit of exchange that is not backed by a government-issued legal tender. In virtual worlds, there are “closed-flow” transactions, “open-flow” transactions, and hybrid transactions.

Transactions in closed-flow virtual currency systems don’t generate taxable income because the virtual currency has no value outside of the system. Simple as that.

In the middle of the road hybrid virtual currency system, some of the flow between the virtual currency and items outside the system is closed, but there is a (third-party) exchange allowing users to exchange virtual goods for real money.

Example: In the multiplayer online-role playing game World of Warcraft, users create avatars that acquire skills and traits, and these avatars may be sold to other users for real dollars.

In an open-flow virtual currency system, virtual currencies can be used to purchase both real and virtual goods and services, and can be exchanged for government-issued currency.

Example: Bitcoin.

Back to point #1, whether transactions involving virtual currencies may be taxable. The report discusses one example in a hybrid system:

  • Ann plays an online game and amasses virtual tools that are valuable to her avatar. The online game does not allow users to directly exchange their virtual tools for U.S. dollars, but rather they can do so using a third-party, making this a hybrid system. Ann uses a third-party exchange not affiliated with the online game to coordinate the transfer of her virtual tools to another player in exchange for U.S. dollars. The transfer is conducted by the third-party exchange and payment is mediated by a third-party payment network. Ann may have earned taxable income from the sale of these virtual tools.

And two examples involving Bitcoins:

  • 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.

In other words, a transaction happens so it may be taxable. Gee, thanks. I believe the report doesn’t take a more firm position by analyzing the possible tax treatment of the transactions because it doesn’t have the answers.

Sure enough, on the page following the Bitcoin examples, the report notes

characterization depends on whether the virtual economy activity or virtual currency unit is to be treated as property, barter, foreign currency, or a financial instrument. . . . [S]ome virtual currency transactions could be considered barter transactions.

It also notes basis issues, but that’s pretty much it. By not delving into the arguments in favor of or against each of the characterization types, the report punts on trying to figure out proper tax treatment of transactions involving Bitcoin and other virtual currencies.

So yeah, taxpayers may not be compliant on transactions involving Bitcoin because they don’t have the answers either.

I can only take the GAO’s punt as a challenge to the IRS—and practitioners like me—to figure it all out.

We’re on it, GAO. Stay tuned.

COMPENSATION DISCLAIMER: Please note that Taxes in the Back has financial relationships with some of the merchants mentioned here. Taxes in the Back may be compensated if consumers choose to utilize the links located throughout the content on this site and generate sales for the said merchant.