In the US, purchasing a cup of coffee with bitcoin is relatively straightforward, but it comes with a complimentary tax complexity. The bureaucratic burden of form-filling is significant enough to discourage users from utilizing the largest cryptocurrency for real-world transactions, according to the Cato Institute, a libertarian think tank advocating 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, wrote in a report, 'Using Bitcoin as money has never been easier, yet the tax code imposes an incredible burden on law-abiding citizens. Something as simple as 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 treated as if an asset has been sold, triggering capital gains calculations. Calculating these gains is not straightforward, as it involves determining when the bitcoin was originally acquired, its cost, and its value at the time of spending.
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.
These details must be retrieved, recorded, and reported for every transaction. The risk of penalty or audit in case of a reporting mistake further exacerbates the issue.
To address this problem, Anthony proposes 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' with a threshold above which capital gains apply. 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 $200. However, he argues that this threshold is too low and suggests linking it to average household spending, around $80,000, to better reflect real-world consumption.