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The IRS Gets Told to Work on Its Bitcoin Taxation Plan

Last Updated March 4, 2021 4:52 PM
Samburaj Das
Last Updated March 4, 2021 4:52 PM

A review by the Treasury Inspector General toward evaluating the IRS’ strategy to address income streams produced via virtual currencies has determined that the IRS has done very little in this regard.

In a newly released report  [PDF], the Treasury Inspector General for Tax Administration (TIGTA) has determined that the Internal Revenue Service (IRS)  has done very little to implement a program for noncompliance issues with potential taxpayers engaging in transactions with virtual currencies.


An excerpt from the review read:

None of the IRS operating divisions have developed any type of compliance initiatives or guidelines for conducting examinations or investigations specific to noncompliance related to virtual currencies. In addition, it does not appear that any of the actions already taken by the IRS to address virtual currency tax noncompliance were coordinated to ensure that the IRS maintains a strategic approach to the tax implications of virtual currencies.


The review highlighted the Silk Road investigation as an example of virtual currencies used by “unscrupulous individuals,” before urging the IRS to prepare a taxation strategy for law-abiding users of virtual currencies.

Bitcoin users could soon see effective taxation guidelines from the IRS.

The Inspector General then warned that the lack of an effective strategy by the IRS will result in the failure of detecting violations by taxpayers.

“Until a comprehensive virtual currency strategy is developed, the IRS is open to the risk that undetected noncompliance of virtual currency taxable transactions will result in an increase to the Tax Gap,” the Inspector General remarked.

Recommendations for Effective Bitcoin Taxation

In order to achieve a competent taxation strategy, the IG laid out three recommendations for the IRS. The first suggestion advises a coordinated effort from various industry regulators and law enforcement agencies, alongside the IRS. Such an effort would see the agencies share methodologies and common obligations related to virtual currencies.

Secondly, the IG recommended that the Deputy Commissioner for Services and Enforcement provide guidance to assess the required documents and tax treatments relevant to different uses of virtual currencies. The suggestion meant to provide additional guidance to the IRS.

Finally, the IG also recommended that the same commissioner revise third-party information reporting documents in order to identify amounts of virtual currency used in taxable transactions.

The IRS has agreed to all three recommendations.

The original guidelines  [PDF] by the IRS on bitcoin were issued as early as March 2014. It wasn’t long before the guidance measures provided by the IRS for virtual currency users was questioned during an official small business hearing, a question that remains to this day as evident in the negative report by the IG.

In May this year, the American Institute of CPAs contacted the IRS to clarify the tax status of small virtual currency transactions among other questions surrounding virtual currencies. Evidently, the IRS remains unequipped to provide the answers. More recently, the IRS reportedly halted its proceedings on the basis in which individuals report their earnings from bitcoin, citing a lack of additional guidance to build upon and implement its original list of guidelines. With the IG’s review, the IRS could soon get the help it needs to implement a bitcoin tax strategy.

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