In the US, buying coffee with bitcoin is relatively straightforward, but the resulting tax implications can be overwhelming. The administrative burden of filing tax returns is so significant that it deters individuals from using bitcoin for everyday transactions, according to the Cato Institute, a libertarian think tank that advocates for limited government and individual freedom. The institute suggests that abolishing capital gains tax could alleviate this issue. Nicholas Anthony, a research fellow at the institute, notes that 'using Bitcoin as money has never been easier, yet the tax code imposes a substantial burden on law-abiding citizens.' He explains that something as simple as buying coffee daily with bitcoin can lead to over 100 pages of tax filings.
This is because the tax system treats every bitcoin transaction as a sale of an asset, triggering complex capital gains calculations. These calculations require 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. However, this process can be complicated, especially if the bitcoin was accumulated in multiple batches, each with its own cost basis and purchase price.
The risk of penalty or audit for reporting errors adds to the complexity. To address this issue, Anthony suggests that Congress could abolish capital gains tax on bitcoin, exempt it from capital gains when used as a payment method, or create a 'de minimis tax' that only applies to transactions exceeding 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 a certain threshold, such as $200 or a higher amount linked to average household spending.