In the United States, it is relatively simple to buy a cup of coffee using bitcoin, currently valued at $75,784.84, but the subsequent tax implications can be overwhelming. The Cato Institute, a prominent libertarian think tank, argues that the tax burden associated with using bitcoin for real-world transactions is a significant deterrent. According to the institute, abolishing capital gains tax could alleviate this issue.
Nicholas Anthony, a research fellow at the institute's Center for Monetary and Financial Alternatives, notes that 'it has never been easier to use bitcoin as a form of money, yet the tax code imposes a substantial burden on law-abiding citizens.' He explains 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 treats every bitcoin transaction as if an asset has been sold, triggering complex capital gains calculations. To calculate these gains, it is necessary to determine when the bitcoin was initially acquired, its original cost, and its value at the time of the transaction.
The difference is then treated as a taxable capital gain or loss. However, this process can be complicated, particularly if the bitcoin was accumulated in multiple batches.
Anthony suggests that the system is flawed and proposes several potential solutions, including abolishing capital gains tax on bitcoin or exempting it from capital gains tax when used as a payment method. Another possible solution is to introduce a 'de minimis tax,' which would only apply capital gains tax to transactions exceeding a certain threshold. He cites 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 argues that this threshold is too low and suggests linking it to average household spending, around $80,000, to better reflect real-world consumption.