Crypto Tax Payments Get Few Takers as More States Eye Programs

In the two years since Colorado became the first state to accept cryptocurrency for payment of taxes, it hasn’t collected enough revenue to cover the cost of a single Bitcoin. Utah, the only other state to accept digital currency for taxes, hasn’t received any payments at all.

Despite taxpayers’ general lack of enthusiasm for digital currency as a payment method, policy makers in a handful of states are lining up to follow Colorado and Utah. Arizona came close this year to passing a bill, S.B. 1128, directing the state to accept cryptocurrencies for payment of taxes, fines, and fees. An Ohio lawmaker introduced similar legislation, S.B. 317, last month.

And Louisiana’s treasurer just announced the state would accept cryptocurrency as payment for certain state services, highlighting one resident’s crypto payment of a $50 civil fine to the state Department of Wildlife and Fisheries.

“If we want to encourage innovation and free enterprise in Ohio, we should do everything we can to normalize the use of cryptocurrencies,” said state Sen. Niraj Antani (R), sponsor of the bill in that state. “By allowing Ohioans to pay their taxes and fees with cryptocurrency, we will be on the cutting edge.” Antani isn’t running for re-election and lost a primary bid for a seat in Congress.

Some of the new interest can be traced to the recent surge in the price of Bitcoin, which has traded between $55,000 and $71,000 over the last six months. This higher and more stable price range followed a period of “crypto winter” when token prices hovered around $25,000 for much of 2022 and 2023. If the current trend continues, more states may adopt crypto as a payment method, said Miles Fuller, senior director of government solutions at the cryptocurrency tax compliance company TaxBit.

Skeptics, however, say Colorado and Utah are examples of states trying to solve a problem that doesn’t exist. Digital currencies might be interesting, but they offer no practical solutions to any payment problems taxpayers and state revenue departments currently encounter.

“I just don’t understand why states want to do this other than the fact it may look ‘cool,’ ” said Omri Marian, a professor of tax law at the University of California Irvine School of Law. “It makes no policy sense. It’s an added collection cost to the state with no discernible benefit.”

Splash and a Trickle

Colorado Gov. Jared Polis (D) made a big splash in September 2022 when he launched the state’s cryptocurrency program, but taxpayers barely noticed. The state Department of Revenue has accepted 72 tax payments in digital currencies in the last two years, totaling $56,510. There has been a gentle increase in participation: The state processed eight cryptocurrency payments in 2022, 22 in 2023, and 42 so far in 2024.

That’s out of more than 3.2 million individual income tax returns and more than 61,000 corporate returns the department processes each year. In 2023 the state had net personal income tax collections of $10.2 billion and corporate tax collections of $1.28 billion.

A spokesperson with the Utah State Tax Commission said it has not received any cryptocurrency payments..

Taxpayers’ reluctance can be tied, at least in part, to costs layered on top of each transaction, Fuller said.

Colorado and Utah don’t recognize crypto as legal tender and can’t accept digital currency directly, so their revenue agencies have contracted with third parties to broker each transaction and immediately convert digital currencies into US dollars. That means paying in crypto comes at a price to taxpayers, with the payment processor assessing a fee. Coloradoand Utah, for example, use PayPal, which charges a service fee of $1 per transaction, plus 1.83% of the payment amount.

“Essentially there is an economic disincentive for a taxpayer to use that payment route,” Fuller said. “If you’ve got Bitcoin, you’re probably better off selling it on Kraken or Gemini with lower fees and transmitting the cash to the government.”

Fees aside, taxpayers with substantial positions in crypto may want to avoid tax transactions that turn into taxable events, said Andrew Appleby, a professor of tax law at Stetson University College of Law in Florida.

“When a taxpayer uses cryptocurrency to pay a tax liability, that transaction will generally constitute a disposition of an intangible asset, which itself creates a new taxable transaction,” Appleby said. “If a taxpayer acquired a Bitcoin for $40k and subsequently transferred it to a state taxing agency for $55k, the taxpayer would have a $15k gain on that transaction.”

Lots of Legislation

State legislators have demonstrated a strong interest in cryptocurrency, although mostly not in relation to taxes. Hundreds of bills have been introduced in three dozen states since 2022, ranging from consumer protection measures to tax incentives supporting the development of blockchain technologies. A handful of the bills have dealt with tax administration issues, said Chelsea Canada, an analyst at the bipartisan National Conference of State Legislatures.

The high-water mark for legislation that would allow revenue agencies to accept digital currencies as payment came in 2022. After Colorado and Utah enacted their laws, lawmakers in Arizona, California, Hawaii, Illinois, Louisiana, New York, and Oklahoma considered bills, but didn’t take final action. In the last two years, Florida, Kansas, and New Hampshire have also considered these types of bills, Canada said.

Despite this track record, the idea could get some traction in a handful of state legislatures next year in response to a bullish vibe flowing through the industry, Fuller said.

State revenue agencies have generally adapted to new payment models in response to taxpayer demands, Fuller said. Adoption of crypto could come quicker, he added, if the industry and revenue agencies found ways to reduce transaction costs.

Appleby predicted some states would follow Colorado and Utah to demonstrate their receptiveness to a new and attractive business model. Colorado’s program was spurred in part by Polis’s personal enthusiasm for blockchain technology.

“States may want to signal a crypto-asset-friendly regulatory environment to incentivize crypto-asset businesses to migrate to the state,” he said.