The Cato Institute is calling on US policymakers to eliminate capital gains taxes on cryptocurrencies, arguing that the current tax system is one of the biggest barriers to Bitcoin’s evolution from an investment asset into a functional currency. The proposal, outlined in a recent policy report, reframes crypto taxation as a structural issue that is limiting real-world adoption, and not just a compliance matter.
At the center of the argument is a simple claim that tax policy is shaping how people use Bitcoin, and right now, it discourages spending.
Capital Gains Tax Turns Everyday Crypto Use Into a Tax Burden
Under current US rules, cryptocurrencies are treated as property rather than currency. This means that every crypto transaction is considered a taxable event, requiring users to calculate gains or losses based on price changes since acquisition. According to Cato researcher Nicholas Anthony, this creates a system where using Bitcoin for daily transactions becomes impractical. When users make payments using crypto, they must track the purchase price, time of acquisition, the coin’s value at the time of spending, and the resulting gain or loss.
Each of these details must be reported to the IRS, often across multiple forms. This means something as simple as buying coffee with Bitcoin can generate extensive tax paperwork over time, potentially running into dozens of pages annually for active users. The result is a behavioral distortion. Instead of functioning as money, Bitcoin is increasingly treated as a long-term investment asset. Cato argues that this is not a natural outcome of the technology, but a direct consequence of how it is taxed.
Cato Institute Proposes Policy Reform to Drive Crypto Adoption
Cato’s proposal is not limited to full tax elimination, though it presents that as the most straightforward solution. The report outlines several policy alternatives aimed at reducing friction. These include full removal of capital gains tax on crypto, exemptions for crypto used in everyday purchases, a de minimis threshold, where small transactions are tax-free, and the alignment of crypto tax treatment with foreign currency usage
Each of these options is designed to enable crypto to function as a medium of exchange without excessive reporting burdens. The broader argument extends beyond Bitcoin. Cato describes the issue as one of currency competition, where tax policy should not favor one form of money over another. By removing capital gains taxes, policymakers would allow the market to determine whether digital assets can compete with traditional fiat systems.
This conversation comes at a time when crypto payment infrastructure is improving, with wallets, payment processors, and merchant adoption making it easier to use Bitcoin for online transactions. Still, the report states that tax complexity is the primary constraint on adoption.
While Bitcoin has the technical capability to function as everyday money, the current tax framework is discouraging users. As such, the Cato Institute is calling for the removal or reform of capital gains taxes.
