Governments have already effectively made it impossible for people to use bitcoin as a medium of exchange, as they expect taxes to be paid on bitcoin gains. Thus it cant function as a medium of exchange (same goes for gold btw.). Unless Government loses its control on its money monopoly this law wont be altered.
I didn't get that point. If you buy something for dollars and then sell it for dollars, you still have to pay taxes. What am I missing here and what is the difference between dollars and bitcoins then?
The difference is that the "medium of exchange" is taxed.
For example: If the merchant accepts dollars and holds onto them and eventually uses them to buy new supply (i.e. sells dollars), he doesnt have to pay capital gains taxes on a possible increase in the dollars value. If the dollar trades higher versus the euro, the government does not force you to pay taxes on these exchange rate "gains".
However if the merchant accepts bitcoin and holds on them and eventually uses them to buy new supply (i.e. sells bitcoins), he will have to pay capital gains taxes.
The same is true for your average bitcoin holder. If he buys one bitcoin for 100 dollars and eventually buys products with the same bitcoin (which is now worth 500 dollars) he will have to pay capital gains taxes on the 400 dollar increase. He wont have to do this if dollars increase in value in comparison to bitcoins, euros or any other currency.
My (layman) understanding of capital gain tax laws is that you have to pay capital gain taxes only if you buy the asset for a certain amount of dollars, then sell it for a bigger amount of dollars. In the example above it is not the case since the asset (bitcoins) is not sold for dollars but spent directly for buying goods. If this understanding is wrong, I am interested by sourced rebuttals.