...Bitcoin transactions that avoid paying applicable taxes are in fact illegal...
All transactions that avoid paying applicable taxes are illegal. What's that got to do with Bitcoin?
To be more accurate, all transactions MAY require you to report the income/loss from that transaction, annually. Technically, if your baseball card increases in value from $1 to $1,000 and you realize that value in a sale, then that's reportable income. Bitcoin is no different. (USA)
From what I understand, whether it gets reported as 'income' or as a 'capital gain' may depend on your jurisdiction. My accountant's advice in the UK to me is that it becomes taxable as a capital gain only if and when the realised gain is more than £10,000 p/a. Of course this may change because as Coinseeker correctly says it is still a gray area.