GAO Issues Report On Tax Compliance Issues Regarding Virtual Economies and Currencies

We are updating our resource page to include a May 2013 U.S. GAO report on potential tax compliance issues related to virtual economies and currencies, which followed on the heels of FinCEN’s virtual currency guidance in March 2013 (read our analysis here).

The GAO guide recognizes that virtual currencies pose various tax compliance risks, but acknowledges that the actual degree of noncompliance is not known and that there are no tax rules specific to virtual currencies. Specifically calling out Second Life Linden dollars and Bitcoins, the GAO enumerates the varied uses of virtual currencies within and outside their virtual worlds and explains how use of virtual currency may give rise to taxable income.

The report notes that the IRS issued information in 2009, but that the information was limited and thus, the GAO suggests, the IRS missed an opportunity to inform taxpayers on these issues.

The report also indicates that the IRS has been taking steps towards addressing tax compliance in connection with virtual currencies, including developing training sources for its agents.

In other words, while virtual currencies may presume themselves as independent alternatives to traditional currencies, their efforts to be recognized as legitimate instruments of trade will necessarily invite regulatory scrutiny—and taxation is but one step in that process.