Bitcoin and Taxes, Now Unavoidable

If you don’t know anything about the Bitcoin market, know this: you can use the digital currency as a form of payment on sites like, Amazon, and even Victoria’s Secret.

Bitcoin demand is very real. In fact, the digital currency is so popular that the Internal Revenue Service decided to get involved.

In March, the IRS made its first major ruling on digital currencies, including Bitcoin. The agency ruled that digital currencies are not actual currency but rather a form of property and, as such, are susceptible to capital gains tax. Naturally, this decision was met with feelings of anger and curiosity. But for the average Bitcoin enthusiast one important and very practical question surfaced: How on earth am I going to pay my taxes?

I had a chance to speak with Jake Benson the founder and CEO of LibraTax – an online accounting software company that helps individuals prepare their Bitcoin taxes.

Who is using Bitcoin?

Benson: More and more people believe in digital currencies as a technology and Bitcoins as a representation of that technology.  Very large and reputable companies such as PayPal are now enabling Bitcoin as a payment rail for digital goods. Granted, some users are still crypto-anarchists, libertarians, and criminals, but overall, the digital currency market is evolving quickly and becoming much more mainstream.

Last year the IRS ruled that Bitcoins are considered property and not currency. How will this impact the Bitcoin market and taxpayers in general?

Benson: The immediate knee-jerk reaction was a disaster. How on earth are people going to keep track of all their “trading” activity? Bitcoins are now considered a form of property so you need to apply capital gains tax to every single transaction you make, no matter the size. Whether you are using Bitcoins to buy a cup of coffee or buy a house, you still need to log that transaction.  It’s seemingly impossible to keep these records manually, and there can be a lot of math involved in calculating the right tax.

LibraTax automates this process and makes accounting easy for the Bitcoin user.

What is LibraTax all about?

Benson: There are currently no accounting software packages that account for Bitcoin transactions. LibraTax is an affordable and easy way to track your Bitcoin transactions while staying compliant with the new IRS guidelines.

Who is going to use your service and do you see this demographic changing over time? 

Benson: Everybody that touches a digital currency will need a service like LibraTax if they want to remain compliant. Our initial product is going to be used by individual tax preparers and by tax professionals.  A lot of CPAs have already expressed interested in our service.

I think the market will continue to grow over time as the use of digital currencies continues to rise. A lot of people who are on the fence right now are afraid of the history and volatility of the Bitcoin market. However, I think the IRS ruling established a sense of legitimacy that will hopefully push the digital currency market in the right direction.

What types of enforcement policies are in place to ensure that people pay their Bitcoin taxes?

Benson: The IRS has been losing resources in general so they are limited in what they can and cannot do. Honestly, right now, I don’t think there is a huge risk of audit.

However, I consider taxes to be faith-based reporting.  It’s your obligation to accurately report your gains and losses. The people who currently pay their taxes are probably going to want to properly pay their Bitcoin taxes.

Over time I think there will be an increased probability of auditing. Every Bitcoin transaction is already stored in the universal public ledger called the block chain so in theory there could be ways of creating enforcement strategies.

What do you think the future of the Bitcoin market will look like – will it disappear, will it be replaced by another digital currency, or will it continue to grow?

Benson: Digital currency is a practical form of innovation. The appetite for this technology is a force of nature that will continue to grow.

I think the Bitcoin market is very uncertain. If the market does not organize well, and if its user base gets divided between the crypto-anarchist type users and the more legitimate user, then it will erode.

John-David Perry (@jdpcyber) holds a BA in Government from Harvard University and a MS in Public Policy from Carnegie Mellon University. He is the co-host of Firewall on He can be reached at