John David-Perry for Fox Business News writes: 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
Overstock.com, 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.
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