UNITED States Government Accountability Office (GAO) has recommended that Internal Revenue Service (IRS) should clarify its guidance on taxation of virtual currencies (VCs) with regard to Foreign Account Tax Compliance Act (FATCA).

In its report titled 'Virtual currencies - Additional Information Reporting and Clarified Guidance Could Improve Tax Compliance', GAO says "The Commissioner of Internal Revenue should clarify the application of reporting requirements under FATCA to virtual currency". This is one of four recommendations in the Report dated 12th February 2020.

GAO has noted that two overlapping reporting requirements apply to taxpayers who have foreign financial assets that include VCs. These two requirements are the Report of Foreign Bank and Financial Accounts (FBAR) filings required under the Bank Secrecy Act and the separate reports required by FATCA. The federal agencies that administer these requirements have not clarified how taxpayers who hold virtual currency should interpret them.

According to the Report, "IRS disagreed with the recommendation to clarify the application of FATCA reporting requirements to virtual currency". IRS stated that U.S. exchanges and other U.S. businesses play a significant role in virtual currency transactions carried out by U.S. taxpayers, and therefore it is appropriate for IRS to focus on developing guidance for third-party reporting under section 6045 of the Internal Revenue Code. IRS also stated that guidance on FATCA may be appropriate in the future when the workings of foreign virtual currency exchanges become more transparent.

GAO also recommended that Financial Crimes Enforcement Network (FinCEN), in coordination with IRS as appropriate, should make a statement about the application of foreign account reporting requirements under the Bank Secrecy Act to virtual currency readily available to the public.

FinCEN agreed with GAO's recommendation to make a public statement about whether virtual currency must be reported on the FBAR. FinCEN's existing regulations do not require virtual currency held in an offshore account to be reported on the FBAR. Additionally, FinCEN stated that it will coordinate with IRS to determine the best approach to provide clarity to the public regarding the FBAR requirement.

According to IRS guidance, convertible virtual currencies-which have an equivalent value in real currency or act as a substitute for real currency-are to be treated as property for tax purposes. Among other things, this classification means that income, including gains, from virtual currency transactions is reportable on taxpayers' income tax returns. Therefore, a payment for goods or services made using virtual currency may be subject to tax to the same extent as any other payment made in property.

GAO also recommended that the Commissioner of Internal Revenue (CIR) should update the FAQs issued in 2019 to include a statement that the FAQs may serve as a source of general information but cannot be relied upon by taxpayers as authoritative since they are not binding on IRS.

In its 4th recommendation, GAO suggested that CIR should take steps to increase third-party reporting on taxable transactions involving virtual currency, which could include clarifying IRS's interpretation of existing third-party reporting requirements under the Internal Revenue Code and Treasury Regulations, or pursuing statutory or regulatory changes.