In the United States, buying a cup of coffee with bitcoin is relatively straightforward, but it comes with a tax burden. The Cato Institute, a think tank that advocates for free markets and limited government, argues that the tax implications of using bitcoin for everyday transactions are so complex that they deter users.
The institute suggests that abolishing capital gains tax could make a significant difference. According to Nicholas Anthony, a research fellow at the institute, using bitcoin as money has never been easier, yet the tax code imposes a significant burden on law-abiding citizens.
For instance, buying a cup of coffee with bitcoin every day can result in over 100 pages of tax filings. This is because the tax system treats every bitcoin transaction as if an asset has been sold, triggering capital gains calculations. The 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 process becomes even more complicated if the bitcoin was accumulated in several batches, as each batch may have a different cost basis and purchase price. The risk of penalty or audit for reporting mistakes adds to the complexity. To address this issue, Anthony suggests that Congress could abolish capital gains tax on bitcoin, exempt bitcoin from capital gains when used as a payment method, or create a "de minimis tax" that only applies to transactions above 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 amount.