Eliminating Crypto Capital Gains Tax Could Unlock Real Currency Competition, Says Cato Institute

The US tax code is actively discouraging Bitcoin and other cryptocurrencies from functioning as usable money. That's the core argument from the Cato Institute, a Washington DC-based think tank that's calling for Congress to scrap capital gains taxes on crypto transactions to level the playing field between digital assets and traditional currencies.

The Real Friction: Tax Burden Over Usage

Nicholas Anthony, policy scholar and research fellow at the Cato Institute, laid out the problem bluntly in a recent report: capital gains tax requirements don't just add friction—they fundamentally undermine crypto's utility as a medium of exchange. When you spend Bitcoin on everyday purchases, the IRS treats it like a taxable event, the same as selling appreciated stock or real estate.

The math is brutal for actual users. According to Anthony, buying coffee daily with Bitcoin can balloon into 70+ pages of tax filings annually. Spend it more frequently? You're looking at 100+ pages. That's not policy; it's a compliance nightmare designed to discourage adoption.

"Bitcoiners know the frustration of tax season all too well," Anthony said. "Yet, at the same time, the tax code puts an incredible burden on law-abiding citizens."

Investment management firm VanEck confirms the issue: crypto purchases fall into the same broad capital assets category as stocks and real estate, triggering taxable events in certain circumstances. This classification alone has crushed mainstream crypto adoption.

Policy Options on the Table

The Cato Institute's preferred solution? Eliminate capital gains taxes entirely—or at minimum, remove them specifically for crypto and foreign currency transactions. As Anthony framed it: "Take the government's thumb off the scale and let competition be the true decider of the best money."

But the think tank acknowledges the political reality. If full elimination isn't feasible, Congress could explore alternatives:

De minimis thresholds would exempt small transactions from triggering capital gains taxes entirely—letting everyday purchases happen without reporting requirements.

Transaction-specific exemptions could limit CGT to large trades while exempting goods and services purchases. The catch? This creates its own compliance maze if people need to prove transaction types.

Anthony warned that any middle-ground approach "risks creating its own compliance nightmare if people are required to prove the transactions. That's better than being taxed, but the process would still be taxing."

Adoption Data Shows Real Demand

The market already hints at demand. A 2025 National Cryptocurrency Association survey found that 39% of US crypto holders actively use digital assets to purchase goods and services. Meanwhile, Bitcoin merchant adoption is expanding globally—about 11,000 merchants worldwide currently accept BTC according to BTC Map data.

That's real utilization fighting against regulatory headwinds.

The Broader Argument

The Cato Institute's policy position ties into competitive currency markets. Allowing crypto to compete fairly without punitive tax treatment could create a more efficient economy where users choose their money based on function, not government disincentives.

"Congress should simplify the tax code so the average American can do what's required with ease," Anthony said. "Doing so would go a long way toward easing Americans' stress each tax season and creating a more competitive economy."