I feel obliged to offer the following ... from
http://www.forbes.com/sites/robertwo...rnment-report/ reported just one month ago
(snip)"Bitcoin In IRS Crosshairs, Says Government Report"(snip)
(snip)Since many Bitcoin transactions are essentially bartering, the IRS can be expected to draw from its Bartering Tax Center. Soon the IRS may have a Bitcoin Center too. The Treasury unit called FinCEN, the Financial Crimes Enforcement Network, already has rules about Bitcoin and the IRS is likely to follow.
In the meantime, the tax rules seem pretty clear. If you provide services or sell goods for Bitcoin, you have income. If you exchange Bitcoins for cash, whether you have gain may depend on whether Bitcoin is really currency or commodity. The latter seems more likely, meaning you have gain to the extent of the appreciation in your Bitcoin.
Income is income, whether you get it in cash or in kind. Bitcoin may be accepted as currency and may not be easy to trace but so are trades and barters. When you barter or swap one item for another, both parties have tax consequences. That’s so even if one party wants credit for later. See IRS Takes A Bite Out Of Bitcoin.
Form 1099 Reporting? Information reporting requirements don’t apply specifically to transactions using virtual economies or currencies, right? Maybe, but they aren’t explicit exempt either. Virtual economy or currency transactions may be subject to third-party information reporting to the extent that these transactions involve the use of a third-party payment network to mediate the transaction and the taxpayer meets reporting threshold requirements. The government worries these things are inherently difficult to track. They want to identify the true identities of the parties.
Tax Evasion. Is Bitcoin a way to evade taxes? The report agrees these transactions are difficult to trace. Some taxpayers may use them to hide taxable income. Many more just haven’t thought about taxes.
There is confusion whether transactions in Bitcoin should be treated as property, barter, foreign currency, or a financial instrument. How you see it can determine the tax treatment. Barter transactions may be the most logical treatment, but not everyone agrees. Besides, even without Bitcoins or other exotica, bartering transactions are inherently under-reported. See Trades And Swaps? IRS Gets A Piece (Really).
And then there is tax basis. If you sell something for less than you paid, you shouldn’t have gain. That’s true in U.S. dollars or in Bitcoin. If you sell something at a garage sale, you may or may not have income.
Brave new world? GAO and IRS don’t think so."(snip)
The major take-away seems to be that by engaging in Bitcoin transactions in any form, the IRS is likely to assume that the person doing so may be attempting to 'fly below the radar' in regard to reported earnings. Even if this is NOT the case, the existence of Bitcoin transactions is likely to attract additional attention from IRS auditors. As the Forbes article points out, the IRS already has a 'special unit' to investigate barter transactions, and Bitcoin transactions are likely to be treated with the same increased levels of 'suspicion' and focused IRS attention.
Increased IRS attention issues aside, there are also potentially massive 'technical' issues involved in properly reporting 'income' paid in Bitcoin. As the article implies, getting paid in Bitcoin is much like getting paid in a foreign currency or in a commodity ... whose values constantly change with respect to US dollars. This means that getting paid 1000 bitcoins worth US$960 this week in exchange for the 'bartered' service of providing a webcam stream, versus cashing the same 1000 Bitcoins in next week when they are worth $990, besides constituting an arguable $960 worth of reportable barter based 'income'', may ALSO trigger a reportable taxable capital gain of $30. The article implies these sort of Bitcoin transactions would fall under the same IRS rules that would apply to being 'paid' a gold coin today worth 960 US dollars in exchange for your services, and selling the same gold coin next week for 990 US dollars. This could in turn lead to an IRS requirement of listing 52 separate short term capital gain ( or loss ) transactions corresponding to 52 separate weekly 'paychecks', in addition to reporting 52 separate weekly amounts of initial barter based 'income', with 52 separate 'exchange rates' applying. And to complicate things even further, the initial $960 barter payment can be considered as 'business' income, while the $30 capital gain must be considered as personal income.