In the U.S., buying a cup of coffee with bitcoin is relatively straightforward, but it comes with a complimentary tax complication. The administrative burden of filling out forms is significant 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 change this, the institute suggests. Nicholas Anthony, a research fellow at the institute's Center for Monetary and Financial Alternatives, stated in a report, "Using Bitcoin as money has never been easier, yet the tax code imposes a substantial burden on law-abiding citizens.
A simple daily transaction like buying 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 complex capital gains calculations. These calculations require determining when the bitcoin used in the transaction 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 situation becomes even more complicated if 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. Furthermore, there is always a risk of penalty or audit if a mistake is made in reporting. To address this issue, Anthony proposes that the system is flawed and can be fixed by Congress in several ways, including abolishing capital gains tax on bitcoin.
He suggests that this would allow competition to determine the best form of money, rather than government intervention. Another option is to exempt bitcoin from capital gains tax when used as a payment method, although this would create the additional challenge of proving that the coins were spent on goods and services. A third option involves introducing 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 argues that this threshold is too low and suggests linking it to average household spending, around $80,000, to better reflect real-world consumption.