In the United States, it is relatively straightforward to buy a cup of coffee with bitcoin, currently valued at $77,949.55, but this convenience comes with the added burden of a complex tax situation. The resulting paperwork is so cumbersome that it deters individuals 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 intervention, and individual freedom. The organization suggests that eliminating capital gains tax could potentially alleviate this issue.
Nicholas Anthony, a research fellow at the institute's Center for Monetary and Financial Alternatives, noted in a report, 'Using Bitcoin as money has never been easier, yet the tax code imposes an immense burden on law-abiding citizens. A simple act like buying a cup of coffee daily 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 viewed as an asset sale, triggering complex capital gains calculations. These calculations are not straightforward, as they require determining when the bitcoin used in the transaction was initially acquired, its original cost, and its value at the time of expenditure. The difference is then treated as a taxable capital gain or loss.
The situation becomes even more complicated when considering that the bitcoin used in the transaction may have been accumulated in multiple batches, each with its own cost basis and purchase price. These details must be retrieved, recorded, and reported for every transaction, posing a significant risk of penalty or audit in the event of an error. To address this issue, Anthony proposes that the system is flawed and can be rectified by Congress through various means, including the abolition of capital gains tax on bitcoin.
He argues, 'Doing so would remove the government's influence and allow competition to dictate the best form of money.' Alternative solutions include exempting 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, or creating a 'de minimis tax' where capital gains apply only if the transaction exceeds a certain threshold. Anthony 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 believes this threshold is too low and suggests linking it to average household spending, around $80,000, to better reflect real-world consumption.