Purchasing Coffee with Bitcoin is Straightforward, but the Subsequent Tax Implications are Not

In the United States, buying a cup of coffee with bitcoin is a relatively simple process, but it comes with a complimentary tax complexity. The burden of form-filling is significant enough to discourage users from utilizing the largest cryptocurrency for real-world transactions, according to the Cato Institute, a libertarian think tank that advocates for free markets, limited government, and individual liberty. Abolishing capital gains tax could potentially alleviate this issue, the institute suggests. Nicholas Anthony, a research fellow at the institute's Center for Monetary and Financial Alternatives, noted in a report that 'it has never been easier to use Bitcoin as money, yet the tax code imposes an incredible burden on law-abiding citizens.' He explained that something as straightforward as buying a daily cup of coffee with Bitcoin can result in over 100 pages of tax filings. This is because the tax system does not treat bitcoin as cash at the point of payment; instead, every transaction is treated as if an asset has been sold, triggering capital gains calculations. These calculations are not straightforward, as they require determining when the bitcoin was initially acquired, its cost, and its value at the time of the transaction. The difference is then treated as a taxable capital gain or loss. The complexity arises when the bitcoin was accumulated in multiple batches, each with its own cost basis and purchase price. These details must be retrieved, recorded, and reported for every transaction, posing a risk of penalty or audit in case of errors. To address this issue, Anthony proposed that the system is broken and can be fixed by Congress through various means, including abolishing capital gains tax on bitcoin. He argued that this would 'remove the government's thumb from the scale and allow competition to be the true decider of the best money.' Another option is to exempt bitcoin from capital gains when used as a payment method, although this would create the additional hurdle of proving that the coins were spent on goods and services. A third option involves establishing a 'de minimis tax,' where capital gains apply only if the transaction exceeds a certain threshold. Anthony cited the Virtual Currency Tax Fairness Act as a potential solution, which could exempt personal crypto transactions from capital gains taxes if the gains do not exceed $200. However, he suggested that this threshold is too low and proposed linking it to average household spending, around $80,000, to better reflect real-world consumption.