You can buy a cup of coffee with Bitcoin quite easily in the US – and get a tax headache for free.
The form-filling burden is enough to dissuade users from using the largest cryptocurrency to pay for real-world transactions, according to the Cato Institute, a libertarian think tank known for its support of free markets, limited government and individual liberties. The abolition of the capital gains tax could be a game-changer, he believes.
“It has never been easier to use Bitcoin as currency,” Nicholas Anthony, a researcher at the institute’s Center for Currency and Financial Alternatives, wrote in a report. “Yet at the same time, the tax code places an incredible burden on law-abiding citizens. Something as simple as buying a cup of coffee each day with Bitcoin can result in over 100 pages of tax returns.”
This is because the tax system does not consider bitcoin as cash at the time of payment. Instead, each transaction is treated as if an asset had been sold at that specific point in time, triggering the capital gains calculation. And the calculations are not simple.
This means determining when the bitcoin (or fraction of bitcoin) used in the transaction was initially acquired, how much it cost, and its value at the time it was spent. The difference is then treated as a taxable capital gain or loss.
Then it gets complicated. It is quite possible that the BTC was accumulated in several batches rather than in a single purchase. So when you paid for the coffee, the coins could have been acquired at different times, each with its own base cost and purchase price. These details must be retrieved, recorded and reported. Every time.
The headache does not end there, as there is always a risk of penalty or audit in the event of an error in the declaration.
The Fix
Anthony said the system is broken and there are several ways Congress can fix it, including abolishing the capital gains tax on Bitcoin.
“It would take the government’s thumb off the scale and let competition become the real decider of who gets the most bang for their buck,” he said.
Another option is to exempt bitcoin from capital gains specifically when used as a payment method. However, this creates the added difficulty of proving that the coins were spent to purchase goods and services.
A third option is to create a “de minimis tax,” under which capital gains would only apply if the transaction exceeds a certain threshold.
He cited the Virtual Currencies Tax Fairness Act as a potential solution, noting that it could exempt personal crypto transactions from capital gains tax as long as gains do not exceed $200. He argued that this threshold is too low and suggested linking it to average household spending, around $80,000, to better reflect real consumption.
