You guys are talking past each other.

The merchant can choose to convert a portion of their fiat sales into Bitcoin. In this case, the customer doesn't need to worry about capital gains taxes. The merchant only reports a tax event if they ever buy dollars with those Sats. (they literally tax you for buying their currrency, WTF?!)

Then there is the case where someone pays with Bitcoin, and the merchant chooses to have it all converted to fiat. This is where the customer is supposed to report the "sale" to USD. Although, I could see how this could also be considered a merchant sale of Bitcoin as the transaction has already happened.

What if it's a purely Bitcoin to Bitcoin transaction? The government would see this as "barter", probably. I dunno, maybe someone can answer?

Responding to you here caused me to realize how little I know about this. I thought it was pretty straight forward, but the way Square is doing this brings up a bunch of new tax questions......