Two U.S. states are steaming ahead with programs that will permit taxes to be paid in cryptocurrency, but the idea has been shelved almost everywhere else in the wake of the crash that has erased hundreds of billions of dollars worth of digital assets.
Revenue departments in Colorado and Utah are implementing programs to enable businesses and individuals to pay their tax bills with virtual currencies such as Bitcoin, Ethereum and Dogecoin, targeting implementation within a few months. The two Western states look to be outliers, however, and still face some logistical hurdles before their programs launch.
The sector’s selloff has taken the value of the global cryptocurrency market below $1 trillion from a $3 trillion peak last November. Bitcoin alone has plummeted more than 70% since Nov. 9.
While a half-dozen states have considered following the lead of Colorado and Utah, a chorus of fiscal watchdogs, academics and crypto skeptics is now warning lawmakers against initiatives that might put state treasuries and taxpayers at risk.
“Anything involving crypto is less appealing in the wake of the massive volatility we’ve seen over the last month, and frankly the last six months,” said Lee Reiners, executive director of Duke University’s Global Financial Markets Center. “I don’t know if that slows momentum at the state level for payment of taxes, but it doesn’t help. And there is no financial benefit to the states to permit it.”
Betty Yee, California’s state controller,
“It’s still too new for government agencies to wade into cryptocurrency,” she told Bloomberg Tax.
New and mysterious
The rationale for tax payments in cryptocurrency has always been thin.
Digital currencies are relatively new, highly volatile, and remain a mystery to most consumers, Reiners said. It’s unclear if Bitcoin or Ether will ever be viewed as viable mediums of exchange, whether for buying pizza or paying property taxes. Moreover, Reiners said, states don’t accept shares of stock, futures contracts, or foreign currencies for the payment of taxes, so why should they accept Bitcoin or Ether?
Still, parades of cryptocurrency investors and lobbyists have descended on state capitols with a mission. Their campaigns have led lawmakers to debate — and, in many cases, to enact — bills to bring cryptocurrencies into their states’ commercial codes and supercharge investments in blockchain businesses. Advocates are also pushing states to permit payments of taxes and services in digital currency, hoping such programs would accelerate crypto’s profile as a medium of exchange.
“A lot of states want to signal they’re friendly to the industry,” said Samuel Armes, president of the Florida Blockchain Business Association. “They want the business, and they want the innovation. So, they will push policies to attract this new wave of tech and talent.”
Thirty-seven states considered bills affecting some aspect of cryptocurrency during the 2022
Utah and Colorado
Utah was the only state to take final action, enacting
Payment gateways serve as an interface between the crypto world and the traditional financial sector. They provide a critical service by locking in a precise dollar value for a coin at the moment of transaction; otherwise, the revenue authority could be out of pocket in the blink of an eye.
Colorado chose a slightly different path than Utah’s, though it aimed at the same goal. In February, Gov. Jared Polis (D), a strong advocate for the cryptocurrency industry, directed the Department of Revenue to develop a program for tax remittances in crypto.
Meghan Tanis, a spokesperson for the department, said the state is still working through some details, but taxpayers will be able to use a special crypto payment portal beginning in September. Like Utah, Colorado plans to use a third party to immediately convert cryptocurrency payments into U.S. dollars.
“We are working to make it similar to how we accept credit cards and other forms of payment,” Tanis said. “The state does not intend to hold a balance of cryptocurrency.”
The industry has a like-minded friend in Florida Gov. Ron DeSantis (R), who slipped several crypto-friendly features into his “Freedom First Budget proposal.” The budget included a plan allowing corporations to pay state fees via cryptocurrency directly to the Department of State.
“The Legislature did not act on this idea during the legislative session that concluded in March, but it could happen next session,” the governor’s press secretary, Christina Pushaw, said.
Diminishing enthusiasm
With “Crypto Winter” setting in, however, momentum has been ebbing. The market crash also raises some practical questions about the feasibility of the Colorado and Utah approaches.
Utah’s program prohibits it from risking state money during the conversion of cryptocurrency into U.S. dollars. Finding a vendor to absorb the risk could prove challenging, said John Valentine, chairman of the Utah State Tax Commission.
“I don’t know what they’re going to find when they go out to the marketplace,” Valentine said. “Markets have to be very effective at scoring their risk. With the uncertainty in the cryptocurrency markets right now, I think it’s going to be harder to find a third-party vendor than when it was more stable a year ago.”
Payment service providers that specialize in cryptocurrencies insist they can fulfill these duties at minimal risk to the states.
“At the end of the day, you want to provide your residents with as many payment options as possible,” said Merrick Theobald, vice president of marketing for Atlanta-based BitPay. “And there is no better way to transact online than with cryptocurrency. It’s a great digital payment method.”
Solves no problems
Tax law scholars predicted that few states would follow Colorado and Utah. Offering cryptocurrency tax payment programs doesn’t solve any inherent problems for taxpayers or state revenue departments, and likely creates new ones, said Omri Marian, a professor of tax law at the University of California-Irvine School of Law.
Marian said the payment of taxes from a digital currency wallet would qualify as a tax realization event triggering either a capital gain or loss at both the state and federal levels. Accounting for these events “creates a new compliance burden for taxpayers and a new administration and enforcement headache for tax authorities,” he said.
He also dismissed programs that require third-party conversion and clearing, arguing that those processes would leave revenue agencies with new layers of complexity and expense to do something that is simple, efficient and inexpensive when transacted in U.S. dollars.
Given the tax policy issues at play, Marian said, Colorado- and Utah-style programs would only be enacted in jurisdictions governed by lawmakers living under the spell of crypto evangelists.
“States have absolutely nothing to gain from this,” he said. “It is a rather pathetic attempt to look cool with crypto bros. As far as tax policy is concerned, it is just stupid.”
