The US Internal Revenue Service should give taxpayers clear rules on how it will handle transactions involving bitcoin and other digital currencies, Nina Olson, the national taxpayer advocate, said yesterday.
Spending bitcoins to purchase goods may trigger capital gains and losses or ordinary income and losses, which have different tax rates, Olson said in her annual report to Congress.
"It is the government's responsibility to inform the public about the rules they are required to follow," she wrote in the report. "The lack of clear answers to basic questions such as when and how taxpayers should report gains and losses on digital currency transactions probably encourages tax avoidance."
Olson, who runs an independent office within the IRS, listed digital currency as one of the 25 most serious issues encountered by taxpayers.
Atop Olson's list was the absence of a clear set of taxpayer rights and the decline in IRS service and enforcement stemming from budget cuts.
"What taxpayers need and deserve is the transformation of the IRS from a traditional enforcement-focused tax agency to a forward-looking modern agency that embraces technology," she wrote.
Today, even with its young age and regulatory uncertainties, bitcoin can be used to pay for T-shirts, food or an appointment with a Manhattan psychiatrist.
The IRS hasn't offered guidance on bitcoin, beyond saying that it is working on the issue and that it has been monitoring digital currencies and transactions since 2007.
According to Olson's report, a big distinction for the IRS to make is whether bitcoin is property, in which case the capital gains rules would apply with a top basic rate of 20 per cent. If it's treated like a "nonfunctional currency," ordinary income tax rates would apply with the top rate being 39.6 per cent.