Purchasing a cup of coffee with bitcoin in the US can be done with relative ease, but the resulting tax implications are a different story altogether. The paperwork required to report these transactions can be so daunting that it deters people from using the cryptocurrency for real-world purchases, according to the Cato Institute. The think tank suggests that abolishing capital gains tax could be a potential solution to this issue. Nicholas Anthony, a research fellow, notes that 'it's never been easier to use Bitcoin as money, yet the tax code puts an incredible burden on law-abiding citizens.' Something as straightforward as buying coffee daily with Bitcoin can lead to over 100 pages of tax filings.
This is because the tax system treats every bitcoin transaction as an asset sale, triggering complex capital gains calculations. The process involves determining when the bitcoin was initially acquired, its cost, and its value at the time of the transaction, as well as calculating the taxable gain or loss.
This becomes even more complicated when the bitcoin was accumulated in multiple batches, each with its own cost basis and purchase price. The potential for penalty or audit due to reporting errors adds to the headache. To address this issue, Anthony proposes that Congress consider abolishing capital gains tax on bitcoin, exempting it from capital gains when used for payments, or introducing a 'de minimis tax' that only applies to transactions exceeding a certain threshold.
He also references the Virtual Currency Tax Fairness Act as a potential solution, suggesting that it could exempt personal crypto transactions from capital gains taxes up to a certain threshold, such as $200, or even higher, around $80,000, to better reflect average household spending.