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

In the United States, buying a cup of coffee with bitcoin is relatively straightforward, but the resulting tax complexities are a significant drawback. The burden of paperwork is substantial 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 freedom. Eliminating 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, stated in a report, 'Using Bitcoin as money has never been easier, yet the tax code imposes an enormous burden on law-abiding citizens. 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 complex capital gains calculations. These calculations require determining when the bitcoin used in the transaction was originally acquired, its cost, and its value at the time of expenditure. The difference is then treated as a taxable capital gain or loss. This process becomes even more complicated when the BTC was accumulated in multiple batches, each with its own cost basis and purchase price, which must be retrieved, recorded, and reported for every transaction. The potential for penalty or audit in case of reporting errors adds to the complexity. To address this issue, Anthony proposes that the system is flawed and can be rectified by Congress through various means, including abolishing capital gains tax on bitcoin. He suggests that this would allow competition to dictate the best form of money. An alternative option is to exempt bitcoin from capital gains tax when used as a payment method, although this would require proving that the coins were spent on goods and services. A third option involves implementing a 'de minimis tax,' where capital gains apply only if the transaction exceeds a certain threshold. Anthony references 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.