Virtual currency may create tax problems

06-18-2013Tax Information

With the explosion of online activity in recent years and the creation of virtual currencies, lawmakers are becoming increasingly concerned about how those actions, sometimes taking place in economies that exist entirely within a specific program, might impair the abilities of the IRS to collect what’s due.

Mixed and open systems users are able to turn a virtual currency or good into something with real-world value, or even U.S. dollars (which could create a taxable item.). “Closed-flow” currencies probably do not come with a tax issue because the virtual currency exists entirely within a virtual setting and cannot be used to obtain real goods and services or turned into U.S. dollars.

For example, the virtual world “Second Life” allows users to buy and sell virtual assets with “Linden dollars,” and that virtual currency can be exchanged for hard currency using third-party payment networks. “Bitcoin” users can use that virtual currency to engage in real economic activity, which could carry tax implications.

Information reporting from third parties may be limited and might offer a way to hide taxable income from the U.S., because transactions are difficult to trace and some virtual economies come with a level of anonymity as well. However, taxpayers are responsible to report such transactions.

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