Paying with Bitcoin is Simple, but the Tax Implications are Not

In the US, purchasing a cup of coffee with bitcoin is relatively straightforward, but it comes with a complimentary tax complexity. The bureaucratic 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 think tank that advocates for free markets and limited government. Abolishing capital gains tax could potentially change this, the institute suggests. Nicholas Anthony, a research fellow, noted in a report that 'using Bitcoin as money has never been easier, yet the tax code imposes an incredible burden on law-abiding citizens.' A simple daily purchase, such as a cup of coffee, can result in over 100 pages of tax filings. This is because the tax system treats every transaction as an asset sale, triggering capital gains calculations that are not straightforward. Determining the original acquisition time, cost, and spent value of the bitcoin used in the transaction is necessary, and the difference is treated as a taxable capital gain or loss. The complexity increases if 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, with the risk of penalty or audit if mistakes are made. The proposed solutions include abolishing capital gains tax on bitcoin, exempting it from capital gains when used as a payment method, or creating a 'de minimis tax' that only applies to transactions exceeding a certain threshold. The Virtual Currency Tax Fairness Act, which could exempt personal crypto transactions from capital gains taxes if gains do not exceed $200, is cited as a potential solution, although the suggested threshold is considered too low.