A libertarian think tank argues that treating bitcoin as a capital asset for tax purposes makes everyday payments impractical due to the complex reporting requirements.
What to know:
- The Cato Institute argues that U.S. tax rules make everyday bitcoin payments impractical because each transaction is treated as a taxable asset sale.
- Using bitcoin to buy routine items like a cup of coffee require tracking multiple crypto purchases, calculating cost basis and gains, and generating extensive tax filings, with the risk of penalties for errors.
- The report urges Congress to ease the burden by eliminating or limiting capital gains taxes on bitcoin payments.
You can buy a cup of coffee with bitcoin easily enough in the U.S. — and get a tax headache thrown in for free.
The form-filling burden is enough to deter 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 liberty. Abolishing capital gains tax could change that, it said.
«It’s never been easier to use Bitcoin as money,» Nicholas Anthony, a research fellow at the institute’s Center for Monetary and Financial Alternatives, wrote in a report. «Yet, at the same time, the tax code puts 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.»
That’s because the tax system doesn’t treat bitcoin as cash at the point of payment. Instead, every transaction is treated as if an asset has been sold just at that moment, triggering capital gains calculations. And the calculations aren’t straightforward.
That means figuring out when the bitcoin (or fraction of bitcoin) used in the transaction was originally acquired, how much it cost and the value at the moment it was spent. The difference is then treated as a taxable capital gain or loss.
Then it gets complicated. It’s quite possible the BTC was accumulated in several batches rather than a single purchase. So when you paid for the coffee, the coins could have been acquired at different times, each with its own cost basis and purchase price. Those details need to be retrieved, recorded and reported. Every time.
The headache doesn’t stop there, because there is always a risk of penalty or audit in case you make a mistake in reporting.
The fix
Anthony said the system is broken and Congress can fix it in several ways, including abolishing capital gains tax on bitcoin.
«Doing so would take the government’s thumb off the scale and let competition be the true decider of the best money,» he said.
Another option is to exempt bitcoin from capital gains specifically when used as a payment method. However, this creates the additional hassle of proving that the coins were spent to purchase goods and services.
A third option involves creating a «de minimis tax,» under which capital gains apply only if the transaction exceeds a certain threshold.
He cited the Virtual Currency Tax Fairness Act as a potential fix, noting that it could exempt personal crypto transactions from capital gains taxes as long as the gains do not exceed $200. He argued this threshold is too low, and suggested linking it to average household spending, around $80,000, to better reflect real-world consumption.