A new Cato Institute paper argues that U.S. capital gains rules make “bitcoin taxes make no sense,” burying everyday BTC payments in paperwork and locking the asset into a hoarding role instead of money.

The Cato Institute is calling for a reset of how the United States taxes bitcoin, arguing that current rules make it almost impossible to use the asset as everyday money. In a new blog post, research fellow Nicholas Anthony writes that “bitcoin taxes make no sense,” because every transaction is treated as a taxable event under capital gains rules.

Anthony notes that under existing guidance, bitcoin is treated as property, not currency, meaning users must calculate gains or losses each time they spend BTC (BTC), no matter how small the purchase. “It’s never been easier to use bitcoin as money,” he said, “yet, at the same time, the tax code puts an incredible burden on law‑abiding citizens.”

In his analysis, Anthony describes how something as trivial as buying a cup of coffee with bitcoin every day can snowball into “over 100 pages of tax filings” over time. For each transaction, users must record the date they acquired the BTC, the price paid (cost basis), the date they spent it, and the dollar value at the time of the purchase, then report it all on Form 8949 and Schedule D.

Beyond sheer paperwork, Anthony argues the structure “discourages real‑world use” and nudges people to hoard BTC rather than spend it, because capital gains rules are designed to reward long‑term holding. In his words, current policy has “effectively paralyzed Bitcoin’s use as a currency” even as wallet infrastructure and merchant tools make payments technically straightforward.

The think tank sketches several policy fixes, ranging from eliminating capital gains on cryptocurrency payments entirely to carving out exemptions for day‑to‑day spending. Anthony points to the long‑running Virtual Currency Tax Fairness Act proposal, which would exempt gains under $200 per transaction, but calls that threshold “too low” to match typical consumer behavior in a high‑inflation environment.

Cato’s intervention lands in the middle of U.S. tax season, as the Internal Revenue Service rolls out expanded crypto reporting rules that will see broker‑reported digital asset sales matched against Form 8949 entries and new 1099‑DA disclosures. At the same time, lawmakers are still debating de minimis exemptions, with some revised bills shifting relief toward regulated stablecoins, prompting criticism from bitcoin advocates who say Washington is “picking winners and losers” in the crypto market.

In previous crypto.news reporting on U.S. crypto tax bills and de minimis proposals, coverage has highlighted similar tensions between encouraging innovation and maintaining oversight, as well as concerns that complex filing rules could push retail users offshore or into non‑compliance.

Former Treasury Secretary Henry Paulson has urged US authorities to prepare a contingency plan for a potential future collapse in demand for US Treasurys, warning that the fallout would be “vicious.”

“We need an emergency break-the-glass plan, which is targeted and short-term, on the shelf, so it’s ready to go when we hit the wall,” Paulson told Bloomberg in an interview on Thursday.

“People say, when are you going to hit the wall? I obviously don’t know, it’s impossible to know. When we hit it, it will be vicious, so we have to prepare for that eventuality.”

The US Treasury market acts as the bedrock of the global financial system, serving as a “risk-free” benchmark with other assets, such as corporate bonds, mortgages, and stocks, being priced relative to Treasurys. Instability could cause ripple effects in the global economy.

For years, economists have warned of a potential “doom loop” where investors start demanding higher yields on Treasurys due to risks tied to the government’s burgeoning debts, which are currently more than $39 trillion. 

This could cause an increase in interest payments, currently 4.3% on 10-year notes, which would widen the deficit. But if the Treasury cannot raise what it needs to pay interest, many assume the Federal Reserve would become the principal buyer, Bloomberg reported. 

A double-edged sword for crypto

There could be several potential impacts on crypto markets if the $31 trillion US Treasury market were to melt down.

A Treasury market crisis could potentially trigger a flight to alternative stores of value such as Bitcoin (BTC) or gold. This may happen if the Fed is forced to monetize debt, stoking inflation fears and undermining confidence in the dollar.

However, the world’s largest stablecoin issuer, Tether, is predominantly backed by Treasurys, with 63% of its total reserves comprising US Treasury bills and 10% overnight reverse repurchase agreements, according to the Tether transparency report. 

Related: Ethereum stablecoin supply hits $180B all-time high: Token Terminal

Research lead at the Bitrue trading platform, Andri Fauzan Adziima, told Cointelegraph that this remains a “watch-list macro tail risk,” but if it happens, there could be short-term pain via “spiking yields, tighter global liquidity, and risk-off selling that hits BTC and altcoins hard while amplifying stablecoin risks.” 

“Tether alone holds over $120 billion in Treasurys, making it vulnerable to redemption runs or depegs if confidence erodes and it faces fire-sale pressure.”

However, in the longer-term, it might “accelerate a flight to non-sovereign stores of value, positioning Bitcoin as ‘digital gold’ amid eroding trust in US debt/dollar dominance,”

It is potentially bullish if the crisis highlights fiat vulnerabilities without an immediate systemic meltdown, he said. 

US Treasury conducts largest debt buyback

The US Treasury conducted its largest single debt buyback on Thursday, accepting $15 billion worth of older securities maturing from 2026 to 2028.

Such buybacks enhance Treasury market liquidity by retiring less-traded bonds and providing liquidity and cash to holders who may redeploy it elsewhere in the financial system.

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