The real question around US compliance is how to position Bitcoin holdings in the most favourable light and prove it so that if the IRS initiates an audit then you can provide enough of a trail (e.g. blockchain) to show that you've held onto them for long enough to qualify for certain tax rates and satisfy conditions for capital treatment.
Proving length of ownership is necessary for all capital goods for which the taxpayer hopes to qualify for capital gains rates in the face of an audit. However, audits are retrospective--you don't need IRS permission to claim capital gains rates on your return. You simply need to have supporting documentation to defeat an audit if the IRS audits your return and challenges to applicability of the capital gains rates.
I refer only to wallets held on exchanges above because wallets held privately or in the US generally don't incur compliance obligations under the FBAR (foreign bank accounts) or FATCA (foreign financial assets) information reporting regimes. Specifically, the issue is that the FBAR and FATCA reporting regimes apply to accounts held in foreign financial institutions. Any business that holds financial assets for others is considered a financial institution, so any exchange offering bitcoin wallet services should be a financial institution under these laws. Because all of the major bitcoin exchanges are foreign, FBAR and FATCA reporting becomes an issue for U.S. taxpayers. The threshold for having a FBAR reporting obligation is $10,000, and for FATCA is $50,000. In both cases, the value of foreign accounts or assets is translated to USD.
Note also that financial institutions are actually defined somewhat differently for FBAR vs FATCA contexts. Bitcoin payment processors appear to be financial institutions in the FBAR context, but not in the FATCA context. However, all of the major payment processors are US-based, so FBAR and FATCA don't apply. Generally, U.S. tax law doesn't require you to disclose your domestic assets (the income is what matters.)
>>You simply need to have supporting documentation to defeat an audit if the IRS audits your return and challenges to applicability of the capital gains rates.
This is the crux of the matter: what supporting documentation will be sufficient for the IRS? As Silk Road and other black market operations show, it is not easy to trace transactions and ascertain ownership.
The flip side is that hopefully one can try to use the blockchain to "prove" to the IRS that even though coins may have been transferred to different addresses (example: cold storage address cycling), all such addresses in the chain were owned by the same owner which would substantiate and satisfy the IRS.
The easiest way to have proof would simply be not to transfer the coins to other addresses; if they remain in a single address then it's fairly obvious what the holding period should be. If you cycle the coins, you'd probably have to prove that you were the owner of all the addresses involved.
The standard that applies to Silk Road is not the standard that applies to tax supporting documentation. The Silk Road is a criminal prosecution and thus is held to the highest standard in the land. For the most part, tax documentation merely needs to be reasonable.
Proving length of ownership is necessary for all capital goods for which the taxpayer hopes to qualify for capital gains rates in the face of an audit. However, audits are retrospective--you don't need IRS permission to claim capital gains rates on your return. You simply need to have supporting documentation to defeat an audit if the IRS audits your return and challenges to applicability of the capital gains rates.
I refer only to wallets held on exchanges above because wallets held privately or in the US generally don't incur compliance obligations under the FBAR (foreign bank accounts) or FATCA (foreign financial assets) information reporting regimes. Specifically, the issue is that the FBAR and FATCA reporting regimes apply to accounts held in foreign financial institutions. Any business that holds financial assets for others is considered a financial institution, so any exchange offering bitcoin wallet services should be a financial institution under these laws. Because all of the major bitcoin exchanges are foreign, FBAR and FATCA reporting becomes an issue for U.S. taxpayers. The threshold for having a FBAR reporting obligation is $10,000, and for FATCA is $50,000. In both cases, the value of foreign accounts or assets is translated to USD.
Note also that financial institutions are actually defined somewhat differently for FBAR vs FATCA contexts. Bitcoin payment processors appear to be financial institutions in the FBAR context, but not in the FATCA context. However, all of the major payment processors are US-based, so FBAR and FATCA don't apply. Generally, U.S. tax law doesn't require you to disclose your domestic assets (the income is what matters.)