Taxing Bitcoin Like Property Misses the Point

A Tax Code Built for Holding, Not Spending

The U.S. tax treatment of cryptocurrency was designed for an asset, not for a medium of exchange. That distinction matters. Every time a user spends crypto that has risen in value, the transaction can trigger a taxable event, which turns ordinary payments into accounting exercises. Cato’s argument is straightforward: if policymakers want digital money to compete with fiat currencies, they should stop taxing everyday use as if it were a stock sale. The broader question is not whether crypto should be privileged, but whether money should be taxed like an investment.

That framing is becoming harder to ignore as the IRS tightens reporting around digital assets. Form 1099-DA has begun reshaping compliance expectations, and the agency now treats crypto transactions as part of a more formal reporting regime. That means the old idea of using small amounts of bitcoin or stablecoins for routine purchases is still legally possible, but economically clumsy. If the state wants crypto to remain a speculative asset, the current system works. If it wants currency competition, the tax code is doing the opposite.

Why This Debate Has Returned Now

The policy discussion is not new, but the timing is sharper in 2026. The IRS still classifies cryptocurrency as property for federal tax purposes, and that means gains are generally taxed under the capital gains framework rather than treated as currency receipts. Short-term gains can face ordinary-income rates, while long-term gains retain preferential treatment. The result is a built-in bias toward saving, not spending. That may suit investors, but it undermines one of crypto’s original claims: frictionless digital cash that can move as easily as information.

Cato has long argued that tax policy itself can suppress currency use. In its recent writing on the subject, the institute says capital gains rules discourage the kind of small, everyday transactions that would make crypto function more like money and less like a speculative instrument. That view now collides with a very different Washington trend: more surveillance, more reporting, and more paperwork. The practical effect is to raise the cost of ordinary crypto use even if no new rate hike is enacted.

The Real Trade-Off: Currency Use or Revenue Certainty

The central tension is structural. A government can tax crypto as property and preserve revenue certainty, or it can treat it more like currency and accept more ambiguity around gains, basis, and taxable events. What it cannot do is insist on both frictionless payments and stock-like taxation without creating distortions. In theory, small exemptions could reduce the absurdity of buying coffee with bitcoin and owing tax on a few cents of appreciation. In practice, though, every carveout invites complexity, and complexity is exactly what keeps everyday users away.

That is why the argument over capital gains tax is really an argument over function. If crypto is money, spending it should not feel like liquidation. If it is a portfolio asset, then the current tax framework is coherent, even if inconvenient. The market consequence is subtle but important: the tax regime nudges users toward hoarding rather than circulation, which weakens the payment narrative and reinforces the investment narrative. Over time, that can concentrate activity in fewer hands and fewer venues, rather than broadening real-world adoption.

What This Means For Investors (Our Take)

For investors, the key takeaway is that tax policy is still one of the most underappreciated forces shaping crypto usage. The debate is not just about rates; it is about whether digital assets can behave like money without being taxed like securities. That matters especially for bitcoin, which continues to compete for the “sound money” label even as the compliance burden grows. Until the U.S. changes the treatment of crypto spending, most users will keep behaving like holders, not transactors.

What to watch next is simple: any renewed push in Congress for de minimis exemptions, any IRS expansion of reporting rules, and whether policymakers frame crypto more as payment infrastructure or more as an investment class. Those signals will tell you whether Washington is willing to let currency competition happen in practice, not just in speeches.

Focus: The U.S. can tax crypto as property, or it can encourage it to function as money — it is increasingly proving that it cannot do both.

Lena Strauss, Regulation & Policy Reporter, The Chain Journal