Purchasing a cup of coffee with bitcoin in the US is relatively straightforward, but it comes with a significant tax burden. The Cato Institute, a libertarian think tank, argues that the tax requirements for using bitcoin in real-world transactions are so complex that they deter users. According to the institute, abolishing capital gains tax on bitcoin could simplify the process.
Nicholas Anthony, a research fellow, notes that buying coffee with bitcoin daily can result in over 100 pages of tax filings due to the tax code's treatment of bitcoin as a capital asset. Every transaction triggers capital gains calculations, requiring individuals to track when the bitcoin was acquired, its cost, and its value at the time of the transaction. The complexity increases if the bitcoin was accumulated in multiple batches, each with its own cost basis and purchase price. The institute suggests that Congress can fix this issue by abolishing capital gains tax on bitcoin, exempting it from capital gains when used as a payment method, or creating a 'de minimis tax' with a threshold above which capital gains apply.
The Virtual Currency Tax Fairness Act is cited as a potential solution, which could exempt personal crypto transactions from capital gains taxes up to a certain threshold.