A liberal-leaning research organization argues that treating Bitcoin as a Capital asset for tax purposes makes everyday payment transactions impractical due to overly complex reporting requirements.
In the US, you can absolutely use Bitcoin to buy a cup of coffee – but it comes with a tax headache.
According to the Cato Institute, a prominent think tank advocating for free markets, limited government, and individual liberty, the burden of filing declaration forms is significant enough to deter users from using the largest cryptocurrency for real-world transactions. The institute argues that eliminating Capital gains tax could change that.
“It has never been easier to use Bitcoin as a currency,” Nicholas Anthony, a research fellow at the institute’s Center for Monetary and Financial Solutions, wrote in a report. “But at the same time, the tax system creates a huge burden for law-abiding citizens. Just buying one cup of coffee a day with Bitcoin could result in over 100 pages of tax returns.”
The reason is that the tax system does not treat Bitcoin as cash at the time of payment. Instead, each transaction is XEM a sale of an asset at that moment, thus creating an obligation to calculate Capital gains or losses. And this calculation is not simple.
Users must specify the time when the Bitcoin (or a portion of Bitcoin) was initially purchased, the purchase price at that time, and its value at the time of spending. The difference will then be considered a taxable Capital gain or loss.
The problem is further complicated by the fact that Bitcoin is often accumulated through multiple purchases, rather than a single transaction. This means that when you use Bitcoin to pay for coffee, those coins could come from several different purchases, each with its own Capital basis. All this information needs to be retrieved, recorded, and reported – for each transaction.
Furthermore, users also face the risk of penalties or audits if there are errors in the declaration process.
Solution
Anthony argues that the current system is flawed and that the US Congress could amend it in several ways, including eliminating the Capital gains tax on Bitcoin.
"This would help eliminate government intervention and allow the competitive market to decide which currency is best," he said.
Another option is to exempt Bitcoin from Capital gains tax when used as a means of payment. However, this would create additional difficulties in proving that the Bitcoin was actually used to purchase goods and services.
The third option is to apply a "de minimis tax" mechanism, whereby Capital gains tax is only applied when the transaction value exceeds a certain threshold.
He cited the Virtual Currency Tax Fairness Act as a potential solution, which allows for Capital gains tax exemptions on individual crypto transactions if profits do not exceed $200. However, he argued that this threshold is too low and suggested it should be tied to the Medium household spending level, around $80,000, to accurately reflect consumption patterns.
