You can't omit Bitcoin transactions from your tax return just because they seem anonymous. Concealment is the very definition of tax evasion, "Evasion... involves deceit, subterfuge, camouflage, concealment, some attempt to color or obscure events or to make things seem other than they are"

Quoting in full since its among the most misunderstood yet important distinctions in tax:

http://www.irs.gov/irm/part9/irm_09-001-003.html

9.1.3.3.2.1 (05-15-2008)

26 USC §7201 – Avoidance Distinguished from Evasion

1. Avoidance of taxes is not a criminal offense. Any attempt to reduce, avoid, minimize, or alleviate taxes by legitimate means is permissible. The distinction between avoidance and evasion is fine, yet definite. One who avoids tax does not conceal or misrepresent. He/she shapes events to reduce or eliminate tax liability and, upon the happening of the events, makes a complete disclosure. Evasion, on the other hand, involves deceit, subterfuge, camouflage, concealment, some attempt to color or obscure events or to make things seem other than they are.

So-- IRS seeks _all_ transaction records for all coinbase customers. Not just buying and selling Bitcoin but also people using their wallet services, which would mostly be users moving around their own funds (not a taxable event).

They're doing this on the basis that there might be evidence of tax evasion in there somewhere. Which is plausible, I suppose.

Thing is: All this same data was also emailed to the customers (as coinbase does email notification), likewise for their competitors.

Which means that the IRS could likely get the same data but more comprehensively by simply demanding Google turn over every single email for every user. I can guarantee this would include much more evidence of tax evasion.

So why is a coinbase dragnet a viable demand where a Gmail one-- which would include the same data plus even more tax evasion evidence-- not one? Or is it simply the case that the Gmail demand will show up after this one clears the courts? :)

Oh good, another list I'm on. I'm going to have to start making a list of the lists.

Bitcoin seems obviously like money to me. But I wonder when the IRS is going to start cracking down on other electronic money you can earn. Think about computer games where you can buy credits, or earn them by playing. That sounds like income tax evasion to me; you're getting paid in Green Rupees instead of US Dollars, but you should still be paying income tax on that! And don't forget about frequent flyer miles. (Which are not counted as income because you "can't" sell them, but anyone who reads flyertalk knows that's not the case.)

It's all very interesting. People have been using alternative currencies outside of the IRS's radar for quite a while, and they've mostly ignored them.

I get that taxes are one of the few certainties of life, but this article makes me think of yesterdays "how to hide $400m" article about tax sheltering and offshore incorporation.

I wish there were a way to ruin tax sheltering for the wealthy by finding out the exact formula for what they're doing (say register a business in the Cook Islands ), then commoditizing that via an online service (like Wordpress does for websites), and using bitcoin. Now the masses can pay $29.95 to have a VPS on the Cook Islands, set up their bitcoin wallet on it, and have their own little tax-exempt haven.

Try to structure the system the exact same way the rich people do it, so that authorities necessarily have to shut down the rich at the same time.

Say someone bought Bitcoins from Coinbase and transferred them to their own wallet outside of Coinbase. They haven't sold them, so there's no taxes to pay and nothing to report to the IRS, right?

How is the IRS going to know the difference between that situation, where they have done nothing wrong, and someone who sold them outside of Coinbase and didn't pay taxes on it?

Are they just going to audit everyone over some threshold, or are they going to use this information in existing investigations (or in conjunction with other red flags)

Few people know that federal taxation is primarily a way to spy on people. There are numerous alternative places to apply taxation within the economy that are not remotely as intrusive, time consuming or costly. Tax preparation is a $10 billion dollar industry and the IRS has a $12 dollar budget.

So how would one go about settling up with the IRS on this?

I initially cringed when I saw this, so I went to go download my transactions from coinbase. I realized after looking through them that some of my BTC outbound transfers were to btc-e, and some of those were to cryptsy. So, considering cryptsy kicked the bucket with much of my coin, and I can't get their records...now what? Those outbound transfers are financial losses, and in the grand scheme I lost money due to Cryptsy; but will the IRS settle for that?

There is a huge flaw in this logic from the IRS. If it is a possession, then I can give it away. Like a fudgable dollar I gift away, you cannot tax me on every transaction that doller is engaged in.if I give away the wallet and the dollar, nothing changes. The USA is just trying to stop bit coin with taxes.

What if I buy something with appreciated Bitcoin? Is this a taxable event? If the IRS considers Bitcoin property, am I just bartering with Dell when I buy a laptop with Bitcoin?

Their goal might be to harasss people into not using bit coin. This is a tax nightmare well outside of most peoples understanding.

As at least one person has already struggled with this (subthread now deleted), hopefully the following will help others.

To read the article in full, please click the "web" link above, between "past" and "[...] comments".

WSJ articles can be read in full, if you click through from Google search results.

Note: simply copying the Google link and pasting it here won't work. Presumably Google needs to be the referrer.

I basically expected as much. Wish the article wasn't subscriber only.

The solution to this is obvious: eliminate the IRS. And the income tax. And most of the federal government. Spin off the actually useful bits as private non-profit foundations (or possibly even for-profit companies depending on the scenario) and let them earn their own keep based on the value they provide.

A sufficiently small government can be funded without an income tax, as history shows us.