The Cato Institute published a policy briefing this week arguing that U.S. tax policy is structurally incompatible with Bitcoin functioning as a payment currency. Under rules established by the IRS in 2014, Bitcoin is classified as property rather than currency. That classification means every time someone spends Bitcoin, whether on groceries or a bus ticket, it triggers a taxable capital gains event requiring the user to calculate and report any gain or loss on that specific transaction.

Nicholas Anthony, a policy analyst at Cato's Center for Monetary and Financial Alternatives and the briefing's primary author, illustrated just how quickly the paperwork accumulates. Buying a cup of coffee each day with Bitcoin, he noted, could produce more than 100 pages of IRS Form 8949 filings by the end of the year. "Capital gains tax rates are structured to incentivize long-term holding," Anthony has written, a design that directly conflicts with the frequent transaction patterns required for Bitcoin to serve as everyday money.

A Tiered Set of Fixes, With One Clear Preference

Cato lays out four potential remedies in descending order of preference. The think tank's first choice is eliminating capital gains taxes entirely across all asset classes. Its second preference is exempting cryptocurrency and foreign currency transactions from capital gains treatment. Third is removing the tax only on purchases of goods and services made with crypto. The fallback position, if none of those options advance, is a de minimis exemption: a dollar threshold below which small transactions would not trigger a taxable event.

On that last point, Cato recommends a $10,000 threshold, far above the $200 figure that has appeared in recent congressional proposals. Coin Center, a separate crypto policy organization, has advocated for a $600 threshold modeled on existing foreign currency exemptions, placing its proposal between the two. For broader structural reform, the briefing also points to a consumed-income tax model, under which taxes would apply when earnings are spent rather than when assets are exchanged. The Hall-Rabushka Flat Tax, another framework Cato has advanced, offers a parallel structural remedy with similar effects. Either approach would dissolve the underlying problem without requiring any crypto-specific carveout.

Congress has taken some steps in this direction, though none have become law. The PARITY Act, a bipartisan bill co-sponsored by Representatives Steven Horsford (D-NV) and Max Miller (R-OH), was revised on March 26, 2026, but its updated draft actually removed an earlier $200 de minimis exemption for stablecoin transactions, replacing it with a deemed-basis rule, an accounting mechanism that assigns a fixed cost basis for determining taxable gains. The bill does not include any Bitcoin de minimis exemption. As of today, no de minimis exemption for digital assets has been enacted.

The Compliance Gap Hits Hardest Outside the U.S.

The policy debate in Washington carries direct consequences for users in South Asia and Africa, regions where Bitcoin and stablecoin payment infrastructure is growing fastest. According to Chainalysis data covering mid-2024 to mid-2025, Sub-Saharan Africa received more than $205 billion in on-chain crypto value, a 52 percent year-over-year increase, making it the third fastest-growing region globally for crypto adoption. India ranks first globally in the Chainalysis 2025 Crypto Adoption Index, with Pakistan and Vietnam also placing in the global top four. Pakistan alone added 5.4 million verified crypto users in the recent period, bringing its total to 18.2 million.

Many of those users send and receive funds through remittance channels. Diaspora communities in the United States, including large Nigerian, Ghanaian, Indian, and Pakistani populations, represent a significant source of those cross-border flows. But any U.S. resident using Bitcoin to send money abroad currently faces a taxable event on every transfer, discouraging adoption at precisely the point in the chain where lower fees would matter most.

The Lightning Network, Bitcoin's faster and cheaper payment layer, recorded more than $1.17 billion in monthly public Lightning volume in November 2025, a 266 percent year-over-year surge spread across 5.22 million transactions. Average transaction values on the network rose to $223 by late 2025, up from $118 the prior year, suggesting it is increasingly used for mid-size transfers rather than just micropayments. Binance enabled Lightning deposits in the second quarter of 2026. The infrastructure for low-cost Bitcoin payments across borders is expanding. The regulatory friction at the U.S. end is not.

Stablecoins Fill the Gap Bitcoin Cannot

The practical effect of the current tax treatment is already visible in how markets have adapted. Stablecoins such as USDT and USDC dominate everyday payments and remittances across Africa and South Asia, while Bitcoin is held primarily as a savings or speculative asset. The PARITY Act's approach to stablecoins reflects this division: the revised bill substituted a deemed-basis rule for an earlier de minimis exemption rather than extending outright favorable treatment to stablecoin transactions. Cato's argument is that equalizing the tax treatment of Bitcoin could change the equation, though Congress would have to move first.

Elsewhere, regulators are not waiting. Nigeria updated its tax framework in 2026, with Bitcoin profits now classified as chargeable gains taxed at rates of up to 25 percent, and virtual asset service providers subject to a 30 percent corporate income tax. South Africa implemented the Crypto-Asset Reporting Framework in March 2026, establishing formal reporting requirements for digital asset transactions. Pakistan's Virtual Assets Regulatory Authority launched a live regulatory sandbox on February 20, 2026, allowing Web3 companies to test products under government supervision, including crypto payment and remittance applications. The contrast with Washington's 12-year-old property classification framework is difficult to ignore. Whether U.S. lawmakers treat it as a prompt for action remains the open question heading into this year's tax reconciliation debates.