Bitcoin’s Hidden Tax Problem: How Inflation Could Inflate Investors’ Capital Gains Bills

Bitcoin (BTC) has rallied over 22% this week, after the U.S. Treasury Department announced plans to double the size of liquidity buybacks, an operation meant to help the plumbing of the government bond market rather than the cryptocurrency. While the move pushed the coin to its highest level in three months. It also added a new piece of evidence to a long-running tax argument.

Senators Ted Cruz (R-TX) and Tim Scott (R-SC) urged Treasury Secretary Scott Bessent in March to index capital gains to inflation through executive action rather than a congressional act. House Republicans responded with a similar letter a few days later. Americans for Tax Reform, whose president, Grover Norquist, has publicly argued the case, contacted the White House directly.

Conservative economists and tax reform groups have been making the argument for decades that when an asset's dollar price rises due to the dollar's weakness, taxing the full nominal increase takes a bite out of wealth that never existed. It has traditionally focused on homes, farms, and small businesses. Bitcoin is its most recent illustration.

The Problem With Capital Gains Tax

The Treasury Department's new program added liquidity support buybacks for longer-dated nominal coupon securities, increasing it from $2 billion to at least $4 billion per operation, on Wednesday.