The Ease of Buying Coffee with Bitcoin Contrasts with the Complexity of the Resulting Tax Implications

Purchasing a cup of coffee with bitcoin in the US is relatively straightforward, but the subsequent tax implications are not. The libertarian think tank, Cato Institute, argues that the tax burden associated with using bitcoin for everyday transactions is significant enough to deter its use. According to Nicholas Anthony, a research fellow at the institute, the tax code imposes an undue burden on law-abiding citizens, with something as simple as buying coffee daily resulting in 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. The calculations require determining when the bitcoin was originally acquired, its cost, and its value at the time of the transaction, with the difference being treated as a taxable capital gain or loss. The complexity increases when the bitcoin was accumulated in multiple batches, each with its own cost basis and purchase price. The risk of penalty or audit for reporting mistakes further exacerbates the issue. To address this, 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' with a threshold above which capital gains apply. He also references the Virtual Currency Tax Fairness Act as a potential solution, which could exempt personal crypto transactions from capital gains taxes up to a certain threshold, such as $200, although he argues this threshold is too low.