Last week, it was revealed by Bakkt CEO Kelly Loeffler at Consensus Invest that one of the reasons Starbucks is involved with the upcoming Bakkt cryptocurrency exchange is due to a desire to provide their customers with more payment options — namely in the form of bitcoin. In the past, a Starbucks spokesperson told Motherboard that the coffee chain does not intend to accept bitcoin directly.
Anyone else wondering why Starbucks is working with @NYSE crypto exchange @Bakkt? Bakkt CEO Kelly Loeffler says it was "to be able to give their customers more options in their ability to pay…to be able to pay with bitcoin." at #ConsensusInvest tweeting via @ForbesCrypto pic.twitter.com/TAUiGZ37MU
— Michael del Castillo (@DelRayMan) November 27, 2018
While this sort of announcement is the kind of thing that gets the entire crypto asset community excited, there is a major issue with the plan from a consumer perspective in the form of onerous tax obligations.
Bitcoin’s Real Usability Issue
Over the past couple of years, the increased cost of transacting bitcoin directly on the blockchain has turned into quite the obstacle in terms of making smaller, coffee-sized payments. In fact, the desire to lower fees in order to enable the sorts of low-value payments that are likely to be made at a Starbucks led to the creation of the Bitcoin Cash altcoin in August 2017. Litecoin has also existed since 2011 an alternative to Bitcoin with a focus on smaller payments.
For Bitcoin, the plan for lowering the costs associated with small payments is to move them to secondary layers such as the Lightning Network.
Having said that, there’s another bigger usability issue with paying for coffee at Starbucks with bitcoin — at least in the United States and some other countries. Technically, if someone receives some bitcoin and then buys some coffee with that bitcoin after the bitcoin price has gone up, then that individual is supposed to pay a capital gains tax on their profits.
Unlike foreign currencies, there is no capital gains exemption for purchases made with bitcoin. In this way, bitcoin is a second-class citizen under the law in terms of acting as a medium of exchange, much like gold. In fact, it is basically illegal to use bitcoin to purchase coffee in the United States if there is no intention to pay a potential capital gains tax associated with the payment (likely a large percentage of cryptocurrency users).
Coin Center’s Jerry Brito wrote about these usability issues back in April 2017.
Reminder: you can now donate to Coin Center via Lightning ⚡️https://t.co/ZP3xTVxuvQ
— Neeraj K. Agrawal (@NeerajKA) July 20, 2018
In 2017, there was an attempt to remove the requirement to pay capital gains taxes on bitcoin payments under $600. Rep. Jared Polis and Rep. David Schweikert worked with Coin Center and co-sponsored the Cryptocurrency Tax Fairness Act, but it didn’t go anywhere in Congress. Polis and Schweikert are also co-chairs of the Blockchain Caucus.
Obviously, it’s unclear if capital gains taxes on bitcoin-denominated coffee purchases would be a priority for the IRS. However, this is another area where bitcoin could benefit from more regulatory clarity. The issue becomes more obvious when purchasing Starbucks gift cards, which is likely as far as Starbucks bitcoin integration will go over the short term, worth hundreds of dollars or shopping at a retail outlet focused on more expensive items. Additionally, many small, bitcoin-denominated purchases can add up to a to a lot of unpaid capital gains taxes.