You can buy a cup of coffee with bitcoin easy enough in the US – and get a tax headache thrown in for free.
The form-filling burden is enough to deter users from using the biggest 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 liberty. Abolition of capital gains tax can change that, it says.
“It’s never been easier to use Bitcoin as money,” Nicholas Anthony, a researcher at the institute’s Center for Monetary and Financial Alternatives, wrote in a report. “Yet at the same time, tax laws place an incredible burden on law-abiding citizens. Something as simple as buying a cup of coffee every day 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 time of payment. Instead, each transaction is treated as if an asset had been sold at that very moment, triggering capital gains calculations. And the calculations are not straightforward.
This means finding out when the bitcoin (or fraction of bitcoin) used in the transaction was originally acquired, how much it cost, and the 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 a single purchase. So when paying for the coffee, the coins could have been acquired at different times, each with its own cost basis and purchase price. This information must be retrieved, recorded and reported. Whenever.
The headache doesn’t stop there, because there is always a risk of a fine or audit if you make a mistake in the report.
The correction
Anthony said the system is broken and Congress can fix it in several ways, including eliminating the capital gains tax on bitcoin.
“Doing that will take the government’s thumb off the scale and let competition be the true determinant of the best bang for the 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 used to purchase goods and services.
A third option involves creating a “de minimis tax” whereby capital gains only apply if the transaction exceeds a certain threshold.
He cited the Virtual Currency Tax Fairness Act as a potential solution, noting that it could exempt personal crypto transactions from capital gains taxes as long as the winnings 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 spending.
