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

In the United States, buying a cup of coffee with bitcoin is relatively straightforward, but the resulting tax implications can be overwhelming. The burden of filling out forms can be so great that it deters users from using 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 liberty. Abolishing capital gains tax could potentially change this, the institute suggests. Nicholas Anthony, a research fellow at the institute's Center for Monetary and Financial Alternatives, wrote in a report, 'Using Bitcoin as money has never been easier, yet the tax code places an enormous burden on law-abiding citizens. Something as simple as buying a cup of coffee every day 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. To calculate these gains, one must determine 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. However, this process can be complicated, especially if the bitcoin was accumulated in multiple batches. When paying for the coffee, the coins could have been acquired at different times, each with its own cost basis and purchase price, which must be retrieved, recorded, and reported. The risk of penalty or audit due to reporting errors adds to the complexity. To address this issue, Anthony proposes that Congress can fix the system by abolishing capital gains tax on bitcoin or exempting it from capital gains when used as a payment method. Another option is to create a 'de minimis tax,' where capital gains apply only if the transaction exceeds 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, although he suggests that this threshold should be higher, around $80,000, to better reflect real-world consumption.