In the United States, buying a cup of coffee using bitcoin is relatively straightforward, but it comes with a complimentary tax complexity. The administrative burden of form-filling is sufficient to discourage users from utilizing the largest cryptocurrency for real-world transactions, according to the Cato Institute, a libertarian research organization that advocates for free markets, limited government, and individual freedom. The organization suggests that abolishing capital gains tax could alleviate this issue.
"Using Bitcoin as money has never been easier," notes Nicholas Anthony, a research fellow at the institute's Center for Monetary and Financial Alternatives, in a report. "However, the tax code imposes an enormous burden on law-abiding citizens. A simple daily activity like buying a 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 capital gains calculations, which are not straightforward.
Calculating the capital gains involves determining when the bitcoin was originally acquired, its cost, and its value at the time of the transaction. The difference is then treated as a taxable capital gain or loss. The situation becomes even more complicated if the bitcoin was accumulated in multiple batches, as each batch may have a different cost basis and purchase price.
These details must be retrieved, recorded, and reported for every transaction. Furthermore, there is always a risk of penalty or audit if a mistake is made in reporting.
To resolve this issue, Anthony suggests that the system is flawed and can be fixed by Congress in several ways, including abolishing capital gains tax on bitcoin. "This would remove the government's interference and allow competition to dictate the best form of money," he stated. Another option is to exempt bitcoin from capital gains tax when used as a payment method, although this creates the additional challenge of proving that the coins were spent on goods and services. A third option involves creating a 'de minimis tax,' where capital gains apply only if the transaction exceeds a certain threshold.
Anthony cited 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 argued that this threshold is too low and suggested linking it to average household spending, around $80,000, to better reflect real-world consumption.