You can buy a cup of coffee with bitcoin quite easily in the US, and get a free tax headache.
The burden of filling out forms is enough to deter users from using the largest cryptocurrency to pay for real-world transactions, according to the Cato Institute, a libertarian think tank known for its support of free markets, limited government and individual freedom. Abolishing the capital gains tax could change that, he said.
“It has never been easier to use Bitcoin as money,” Nicholas Anthony, a researcher at the institute’s Center for Monetary and Financial Alternatives, wrote in a report. “Yet at the same time, the tax code places an incredible burden on law-abiding citizens. Something as simple as buying a cup of coffee every day with Bitcoin can result in over 100 pages of tax returns.”
This is because the tax system does not treat bitcoins as cash at the time of payment. Instead, each transaction is treated as if an asset had been sold right at that time, triggering the capital gains calculation. And the calculations are not simple.
That means finding out when the bitcoin (or fraction of bitcoin) used in the transaction was originally acquired, how much it cost, and the value at the time it was spent. The difference is then treated as a taxable capital gain or loss.
Then it gets complicated. It is quite possible that the BTC was accumulated in multiple lots rather than a single purchase. So, when you paid for the coffee, the coins could have been acquired at different times, each with its own cost basis and purchase price. Those details must be retrieved, recorded and reported. Every time.
The headache does not end there, because there is always the risk of sanction or audit in case of making a mistake when reporting.
The solution
Anthony said the system is broken and Congress can fix it in several ways, including abolishing the capital gains tax on bitcoin.
“Doing so would take the government’s thumb off the scale and allow competition to be the real decision on the best money,” he said.
Another option is to exempt bitcoin from capital gains specifically when used as a payment method. However, this creates the additional hassle of proving that the coins were spent to purchase goods and services.
A third option involves creating a “de minimis tax,” under which capital gains are levied only if the transaction exceeds a certain threshold.
He cited the Virtual Currency Tax Fairness Act as a possible solution, noting that it could exempt personal crypto transactions from capital gains taxes as long as the profits do not exceed $200. He argued that this threshold is too low and suggested tying it to average household spending, around $80,000, to better reflect real-world consumption.
