From the U.S. Government Accountability Office, Transcript for: Virtual Currencies and Economies Description: Audio interview by GAO staff with Jim White, Director, Strategic Issues Related GAO Work: GAO-13-516: Virtual Economies and Currencies: Additional IRS Guidance Could Reduce Tax Compliance Risks Released: June 2013 [Background Music] [ Narrator: ] Welcome to GAO's Watchdog Report, your source for news and information from the U.S. Government Accountability Office. It's June 2013. As virtual currencies such as the Bitcoin, or Second Life's Linden dollar, gain momentum, it will be important for taxpayers and the government to understand the effects of virtual economies on real world taxes. A team led by Jim White, a director in GAO's Strategic Issues team, recently examined the tax requirements and compliance risks of virtual economies. GAO's Sarah Kaczmarek sat down with Jim to learn more. [ Sarah Kaczmarek: ] So to start, what are virtual currencies and how do people use them? [ Jim White: ] Virtual currencies are a digital equivalent of cash. They can be used to buy virtual goods such as within a game like Second Life or World of Warcraft. One of the more common virtual currencies today is called Bitcoin. And Bitcoin can be used to purchase physical goods and services, not just virtual goods and services. So there's some stores that will take Bitcoin as payment and in that case, it works very much like foreign currency. It's like buying things in Japanese yen instead of American dollars. And there are exchanges where you can exchange dollars for Bitcoin and vice versa. And the way it works is a buyer and a seller complete a transaction by exchanging Bitcoin addresses, so this is being done on the Internet using their computers. Each party has a computerized Bitcoin wallet and the computers exchange addresses for these wallets and the appropriate number of Bitcoin is moved from one wallet to the other, from the buyer's wallet to the seller's wallet. And the other point about this is it's set up so that it's largely anonymous. [ Sarah Kaczmarek: ] And can people earn taxable income, then, when using these currencies? [ Jim White: ] Yes they can. For example, if you make and sell t-shirts or you make and sell smartphone apps and you're selling those for dollars or you're selling them for Bitcoins, in either case, that may be taxable income to you, and for tax purposes it doesn't matter which currency the transaction's taking place in. Generally, if the transaction would be taxable if conducted in cash--in dollars, then it's probably taxable if it's conducted in Bitcoins. [ Sarah Kaczmarek: ] So then let me ask you, what are some reasons people might not comply with tax laws? [ Jim White: ] There're a couple of main ones. One is there are some websites and blogs that we found that suggest that virtual currencies can be used in transactions that are tax free, and as I just indicated that generally is not true. There's also a lot of uncertainty, however, a lot of confusion about how to characterize transactions that are conducted in Bitcoin. So some of this may be intentional but some of it may be due to confusion. [ Sarah Kaczmarek: ] And what's GAO recommending IRS do to better ensure compliance with tax laws? [ Jim White: ] What we're recommending is that IRS expand on something it did back in 2009. So in 2009, IRS posted on its website some general guidance about virtual economies and the tax consequences of buying and selling inside virtual worlds. What we are recommending now is that IRS expand that kind of general guidance to cover virtual currencies and to clarify for the public that transactions conducted using virtual currencies may have tax consequences. [ Sarah Kaczmarek: ] So finally, for taxpayers or potential users of Bitcoin, what's the bottom line here? [ Jim White: ] I think there are two bottom lines. One from the perspective of taxpayers, transactions in Bitcoins are similar to transactions in dollars or yen. And if the transaction will be taxable in dollars or yen, then you have to consider the real possibility that it's taxable in Bitcoin as well. The other bottom line is for IRS. As I said, we think IRS needs to provide some additional guidance, especially in light of the recent media attention that Bitcoin has generated. So we want IRS to put some general guides on its website that, yes indeed, there may be tax consequences for transactions conducted using Bitcoin. [Background Music] [ Narrator: ] To learn more, visit and be sure to tune in to the next episode of GAO's Watchdog Report for more from the congressional watchdog, the U.S. Government Accountability Office.