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

In the United States, buying a cup of coffee with bitcoin is relatively straightforward, but it comes with a complimentary tax complexity. The burden of form-filling is substantial enough to discourage users 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, and individual liberty. Abolishing capital gains tax could potentially alleviate this issue, the institute suggests. Nicholas Anthony, a research fellow at the institute's Center for Monetary and Financial Alternatives, noted in a report that 'it has never been easier to use Bitcoin as money, yet the tax code imposes an incredible burden on law-abiding citizens.' He explained that something as straightforward as buying a daily 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. These calculations are not straightforward, as they 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. The complexity arises when the bitcoin was accumulated in multiple batches, each with its own cost basis and purchase price, which must be retrieved, recorded, and reported for every transaction. The risk of penalty or audit in case of reporting errors further exacerbates the issue. To address this, Anthony proposed that the system is broken and can be fixed by Congress through various means, including abolishing capital gains tax on bitcoin. He argued that this would 'remove the government's thumb from the scale and allow competition to be the true decider of the best money.' An alternative solution is to exempt 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. Another option is to create 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.