Paying with Bitcoin is Simple, but the Tax Implications are Not

In the US, buying coffee with bitcoin is relatively straightforward, but it comes with a complex tax burden. According to the Cato Institute, a libertarian think tank, the tax requirements for using bitcoin in everyday transactions are so cumbersome that they deter people from using the cryptocurrency. The institute suggests that abolishing capital gains tax could simplify the process. Research fellow Nicholas Anthony notes that while it's easy to use bitcoin as money, the tax code imposes a significant burden on users. For instance, buying coffee daily with bitcoin can result in over 100 pages of tax filings. This is because the tax system treats every bitcoin transaction as a sale of an asset, triggering capital gains calculations. These calculations are complex, requiring users to determine when the bitcoin was acquired, its original 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 multiple batches, each with its own cost basis and purchase price. Users must retrieve, record, and report these details for every transaction, with the risk of penalties or audits if they make a mistake. Anthony argues that the system is broken and can be fixed by Congress in several ways, including abolishing capital gains tax on bitcoin. This would allow competition to dictate the best form of money. Another option 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. A third option is to create a 'de minimis tax,' where capital gains apply only if the transaction exceeds a certain threshold. Anthony 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 suggests that this threshold is too low and should be linked to average household spending, around $80,000, to better reflect real-world consumption.