GAO: AskGAOLive Chat on Virtual Currencies and Taxes



we really appreciate you taking the time to join our chat today to send in your questions you can send them in via email at ask Gao live at gao.gov if you're on twitter you can send them in using the hashtag ask geo live and you can send into your questions or comments right on the Ustream social stream my name is Sarah Kaczmarek I'm in our Office of Public Affairs and I'm joined today by Jim White thanks Jim a director in Gao strategic issues team we're gonna be talking today about virtual currencies such as Bitcoin virtual economies and taxes for Gio's most recent work on this you can find our report Gao – thirteen – five one six right on the Jo homepage at gao.gov just scroll down to Monday's reports and you can find it there for more context today so Jim to kick us off could you tell us a bit about you and your background at Gao yes I'm a director at Gao one of the directors responsible for the tax work we do we do both Tax Policy Analysis and oversight of IRS and we've been asked by the Senate Finance Committee to study virtual currencies great and could you tell us a little bit more about our topic today yes the currency the topic is virtual currencies virtual economies and our focus is on virtual currencies the leading example of virtual currencies today is Bitcoin virtual currencies are the digital equivalent of cash you can use them like cash to carry out transactions the differences there's no physical representation of a virtual currency like Bitcoin it's computer code people have virtual wallets and if a buyer and seller engaged in a transaction both have a virtual wallet they can exchange addresses connect their virtual wallets and carry out a transaction buying or selling coffee cars services computer building services for example buy and instead of exchanging cash the bitcoins are transferred from one virtual wallet electronically to the other thanks Jim and we've got a question here from email from Israel T Israel would like to know if IRS treated virtual currencies like Bitcoin as property or financial instruments how'd that affect the way that virtual currencies are taxed Israel good question and the answer boils down largely to if a transaction would be taxed if it's conducted in cash or some other currencies such as euros or yen if you conduct the same transaction in bitcoins it's very likely going to be taxed there as well you really need to check with a tax adviser on this but the general rule would but would be that those would be treated the same now we've got a question in from Twitter from Jeremy and he says virtual currencies like Bitcoin seems like monopoly money the idea of them being taxed that seems nuts how would that work and in one sense it could seem like monopoly money so a virtual currency that is used inside an online game such as Second Life inside the game if you're buying or selling houses inside the game that's the same as buying and selling houses playing Monopoly in both cases you're using game money monopoly money or Linden dollars in the case of Second Life those transactions are not taxable transactions inside the game but when you move outside the game and start selling assets that you may have accumulated inside a game to outsiders for cash that there's a possibility that at that point that's taxable income and you dough taxes on that or in the case of bitcoins you may not be using the curt the virtual currency inside again at all you may be buying and selling goods and services in the real economy such as a cup of coffee and in that case if you're selling the coffee you may be earning in earning income you may be liable for tax on him thanks Jim our next question came in from email from Jennifer H Jennifer would like to know what is IRS told the taxpaying public about virtual currencies like Bitcoin yeah now it was part of the reason for our report Jennifer we wanted to study what IRS was doing to keep up with the very recent phenomenon of digital currency and before that virtual economies Myers had about four or five years ago put some guidance up on its website discussing virtual economies they had not done the same thing for virtual currencies largely because virtual currency is such a recent development and so we've got a recommendation in the report to IRS to put up at least some informal guidance on its website alerting taxpayers to the issue and that they need to pay attention to whether transactions that they carry out using virtual currencies may be taxable that's a good segue into a question we got over Twitter from Jess Jess would like to know what's the difference between a virtual economy versus a virtual currency a virtual economy is an online a game is probably the best example of this where players interact with each other inside the game it is the digital equivalent of playing Monopoly where the players operating in this artificial economy using monopoly dollars or inside the game using something like Linden dollars to buy and sell in the case of Monopoly a little play hotels and houses are inside a game virtual representations of houses or other assets thanks our next question comes in from email Michele P would like to know do I still owe taxes if I never changed my bitcoins to dollars if you engage in transactions where you earn income it doesn't matter what you're paid in that transaction could be barter it could be carried out in yen or euros or dollars or it could be carried out in bitcoins if you're earning income generally that could be taxable now Mike send us an email wanting to know bitcoins are illegal and if he'll get in trouble with the IRS for using Bitcoin I don't think there's anything illegal about using bitcoins we didn't we didn't get into that issue in our report we were focused on the tax treatment of bitcoins or other transactions carried out using virtual currencies and the extent to which IRS was providing the public and users of these kinds of currencies with some guidance so that they had a little bit of help at least understanding the tax consequences and our next question comes in from mark again by email he'd like to know aren't Bitcoin transactions barter transactions which are already taxable under the Internal Revenue Code if not how is a Bitcoin transaction different from a barter transaction you can imagine it's similar to a barter transaction you could think of it as something like that except that a cash transaction carried out with dollars is like a barter transaction except the transaction is facilitated by exchanging dollars with a barter transaction you're exchanging a good or service for a good or service that's given to you in exchange by by the other party to the transaction so I might provide computer consulting services to someone and that person in it in exchange might tune up my car for me well that's a barter but if I'm selling my services that way even though I wasn't in cash even though it was barter that sort of transaction can be taxable and instead of doing that if the transactions facilitated using cash or using Bitcoin it's also could be taxable if income was earned in the process thanks Jim another email from dandy he would like to know are the points I earned in online games taxable it generally we have some examples of this in our report but generally if you're earning points inside a game and you're not selling those points for dollars to people outside of the game but using the points inside the game that sort of thing is not taxable it's like earning income in a game of Monopoly when you start interacting with the real world and selling points accumulated in a game for dollars to other people at that point that can become a taxable transaction well speaking of income we got a question from Twitter from Johanna summers who would like to know how would a salary paid in Bitcoin be classified for taxes if a salary is paid in Bitcoin that sounds like the functional equivalent of paying a salary in cash and again you need to check with the tax advisor on on this but the general rule would be if your salaries paid in cash or Bitcoin that's taxable income in both cases unless you are in some very special circumstance and that's why you need to check with a tax advisor thanks and we've got an email question from Chelsea who would like to know what do people who pay online virtual world games need to know about the tax law well I think Chelsea what what I've been saying is if you're operating inside the game and not interacting with the world outside of the game those internal interactions are not going to be taxable it's when you start building up assets or points inside a game and then selling those people outside the game for cash or for bitcoins or for yen at that point you may be earning taxable income and subject to tax well speaking of taxes that people might know alex case and in an e-mail wanting to know can i pay my taxes and bitcoins good question and I don't think so but we didn't we didn't try to answer that directly with our report but I I'm not aware that the US government accepts Bitcoin in payment fair enough another question came in from mark who would like to know why should the IRS be concerned about bitcoins the IRS is responsible for enforcing the tax laws and the tax laws define taxable income and generally that definition doesn't depend on the activity being conducted in dollars for example what matters is whether income is being earned not the currency in which the income is being paid so it doesn't matter if you're paid in dollars or euros or yen if you're earning income and you're inside the United States that income would be subject to tax and so if you're being paid in Bitcoin that income would similarly be subject to tax thanks Jim our next question came in from email from Brienne C who would like to know our transactions in virtual worlds tax-free again if you're inside the virtual world and not interacting outside the world those sorts of transactions often are tax free it's when you move again into the real world that you start running into tax issues thanks we've got a couple questions in from email from louisa be her first question is what other virtual currencies are there there are some others I I think it currently bitcoin is the largest is certainly the one most talked about in the media but there are other examples Linden dollars for example would be another one and then Louise a second question is is this really a big deal for IRS or are we talking about a very small amount of money that's a great question and the answer to that is nobody knows for sure we don't know we've got estimates of how many bitcoins are in circulation we don't know how many transactions are carried out using bitcoins and we don't know how many of those transactions are taxable so we don't have a very good sense of the overall impact of this in terms of a proportion the economy our recommendation for that reason was focused more on IRS just getting some information out on its website rather than devoting significant resources right now to a profit to an issue where the magnitude of the issue is just not very well understood and our next question is from Twitter from Johanns summers who would like to know would Bitcoin income be tax of the exchange rate at the time of the paycheck or would it be converted into dollars that's another very good question and that these kinds of technical questions about exactly when the income is realized are things you need to really get some advice from a tax accountant or tax advisor on and how much this information has a RS communicated to the taxpaying public well as I said IRS four or five years ago did put some guidance on its website about virtual economies it was it was general guidance but it was alerting the public to the fact that there there could be some tax consequences there and that's what we're looking for here as well for IRS to just get some information out from an authoritative source that there could be tax consequences to transactions using bitcoins there's some misinformation on the web about the tax treatment of Bitcoin transactions that's one of the reasons we thought this would be a good time for IRS to put something out there now Joe has sent us an email and he would like to know has IRS faced anything like this before or is this a new kind of tax challenge for IRS that tax challenge is here for IRS are actually quite similar the challenges that IRS faces with any cash transaction for wages that are paid with a check where there's w-2 filed and the employer files a copy that w-2 with IRS IRS knows what the salary payment is so IRS is aware of the income there when transactions are carried out in cash however there's there's usually no third party reporting pie RS there are some cases where there's some third party reporting but where there's no third party reporting IRS isn't where the cash transaction and therefore that presents real tough challenges for IRS trying to enforce the tax laws in those situations and it's exactly the same sort of situation from Bitcoin IRS doesn't have any report isn't getting any reports now on those sorts of transactions it they are like cash so given this we got a question from Twitter from Gavin who would like to know what are the specific challenges IRS faces when they're enforcing tax laws on virtual currency transactions yeah well as I said it's very similar to cash transactions IRS isn't where in a cash transaction who the buyer or seller is so they're not aware of who was earning income and therefore it's a real challenge for them to enforce that they might be able to detect unreported income by auditing you and really digging into bank accounts and so on but short of that sort of thing it's a huge challenge for IRS to find that sort of income that got the same problem with Bitcoin transactions and another message in from Twitter from Julian Summers who would like to know when can we expect guidelines from IRS IRS agreed with our recommendation they agreed to put some guidance up on their website they haven't done so yet and I don't know exactly when they'll get it up but they did agree with our recommendation thanks Jim and another question in going back again on transactions in virtual worlds are there some cases whether they're going to be tax free in some cases where they're not going to be tax free I I don't want to say that that something can never happen but generally inside the games those transactions are not going to be taxable it's when you start moving outside of the game that transactions become taxable or if you're using something like a virtual currency like Bitcoin to engage in transactions completely outside the game that I'm buying coffee from a store neither of us are operating inside a game there that sort of transaction gets treated for tax purposes the same way as if it was carried out using dollars mm-hmm another question in from email from Sophie H you'd like to know for people that are using bitcoins what are some of the key things they might want to keep in mind about tax laws Sophie good good question and the simple answer is if it would be taxed if it would be a taxable event if you carried it out using cash then you there's a real strong likelihood that that same transaction or that same event if you carry it out using Bitcoin would be taxable thank you and thanks everyone for sending in your questions me a good place for us to wrap up today really appreciate everyone tuning in sending in your questions and comments to us today if you have any feedback on our chat or any suggestions and how we can continue to improve our live chats that we've done please send them in via email to ask geo live at gao.gov and for more information from the Government Accountability Office you can visit our website that's gao.gov you can follow us on Twitter at u.s. Gao you can find us on facebook at facebook.com slash us Gao and we're on LinkedIn now as well thanks again for tuning in with us today and we hope to see you back next time

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