In the US, purchasing a cup of coffee with bitcoin is relatively straightforward, but it comes with a complex tax burden. The Cato Institute, a libertarian think tank that advocates for free markets and limited government, argues that the tax implications of using bitcoin for real-world transactions are a significant deterrent. According to Nicholas Anthony, a research fellow at the institute's Center for Monetary and Financial Alternatives, "using Bitcoin as money has never been easier, yet the tax code imposes a substantial burden on law-abiding citizens." He notes that something as simple as buying coffee with bitcoin daily can result in over 100 pages of tax filings. This is because the tax system treats every bitcoin transaction as a sale of an asset, triggering capital gains calculations.
These calculations are complicated, requiring the tracking of when the bitcoin was acquired, its cost, and its value at the time of the transaction. The difference is then treated as a taxable capital gain or loss. To make matters more complex, bitcoin may have been accumulated in multiple batches, each with its own cost basis and purchase price. These details must be recorded and reported for every transaction, with the risk of penalty or audit if a mistake is made.
The Cato Institute suggests that abolishing capital gains tax on bitcoin or exempting it from capital gains when used as a payment method could simplify the process. Another option is to create a "de minimis tax" that only applies to transactions above a certain threshold. The Virtual Currency Tax Fairness Act is cited as a potential solution, which could exempt personal crypto transactions from capital gains taxes if the gains do not exceed $200.
However, the institute argues that this threshold is too low and should be linked to average household spending to better reflect real-world consumption.