Crypto Crash weighs the state’s plans for tax payments with Bitcoin
Two US states are steamrolling with programs that will allow taxes to be paid in cryptocurrency, but the idea has been shelved almost everywhere else in the wake of the crash that has erased digital assets worth hundreds of billions of dollars.
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, aimed at implementation within a few months. However, the two western states appear to be outsiders, and still face some logistical obstacles before the programs start.
The sector’s sales have taken the value of the global cryptocurrency market below $ 1 trillion from a peak of $ 3 trillion in November last year. Bitcoin alone has fallen more than 70% since November 9.
While half a dozen states have considered following the lead of Colorado and Utah, a chorus of fiscal watchdogs, academics and crypto-skeptics are now warning lawmakers against initiatives that could endanger state coffers and taxpayers.
“Anything that involves crypto is less appealing in the wake of the massive volatility we’ve seen over the past month, and frankly the last six months,” said Lee Reiners, CEO of Duke University’s Global Financial Markets Center. “I do not know if it is slowing the momentum at the state level for the payment of taxes, but it does not help. And there is no economic benefit for the states to allow it.”
SIGN UP FOR The Exchange, our free weekly tax newsletter
California State Comptroller Betty Yee called a cryptocurrency bill (SB 1275) currently before the California Legislature “fiscally irresponsible,” pointing to price volatility for cryptocurrencies and the lack of robust federal regulations for digital assets.
“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 cryptocurrencies has always been thin.
Digital currencies are relatively new, highly volatile and remain a mystery to most consumers, Reiners said. It is unclear whether Bitcoin or Ether will ever be seen as viable exchanges, either to buy pizza or pay property taxes. Also, Reiners said, states do not accept stocks, futures or foreign currency for the payment of taxes, so why should they accept Bitcoin or Ether?
Nevertheless, parades of cryptocurrency investors and lobbyists have come down to state capitals with a mission. Their campaigns have led lawmakers to debate – and in many cases pass – bills to bring cryptocurrencies into states’ commercial codes and supercharge investments in blockchain companies. Spokesmen are also pushing states to allow the payment of taxes and services in digital currency, in the hope that such programs will accelerate the profile of crypto as an exchange medium.
“Many states want to signal that they are industry-friendly,” said Samuel Armes, president of the Florida Blockchain Business Association. “They want the business, and they want the innovation. So they want to push guidelines to attract this new wave of technology and talent.”
Thirty-seven states are considering bills that affect some aspects of cryptocurrency during the 2022 legislative session, according to Heather Morton, a policy analyst at the National Conference of State Legislatures. Within that group, she said that Arizona, California, Hawaii, Illinois, Louisiana, New York and Oklahoma all considered bills that would authorize the government to accept crypto.
Utah and Colorado
Utah was the only state to take final action, by adopting HB 456, which requires the state and local governments to accept crypto for the payment of taxes from January 1, 2023. The law requires the Department of Finance to enter into a one-third contract. party – a payment gateway for cryptocurrency – to quickly convert cryptocurrency to US dollars before the funds are transferred to the state.
Payment gateways act as an interface between the crypto world and the traditional financial sector. They provide a critical service by locking in an exact dollar value of a coin at the time of the transaction; otherwise the tax authority may be out of its own pocket in an instant.
Colorado chose a slightly different path than Utah, although it aimed for the same goal. In February, Governor Jared Polis (D), a strong spokesman for the cryptocurrency industry, instructed the Department of Taxation to develop a program for crypto tax transfers.
SEE: Tax tax on crypto and NFTs? Yes, the tax authorities want it
Meghan Tanis, a spokeswoman for the department, said the state is still working on some details, but taxpayers will be able to use a special crypto payment portal from September. Like Utah, Colorado plans to use a third party to instantly convert cryptocurrency payments into US dollars.
“We are working to make it similar to how we accept credit cards and other forms of payment,” said Tanis. “The state does not intend to keep a balance of cryptocurrencies.”
The industry has a like-minded friend in Florida Governor Ron DeSantis (R), who added several crypto-friendly features to its “Freedom First Budget Proposal.” The budget included a plan that allows companies to pay government fees via cryptocurrency directly to the State Department.
“The legislature did not act on this idea during the legislative session that ended in March, but it could happen next session,” said the governor’s spokeswoman Christina Pushaw.
With the “Crypto Winter” setting, however, the speed has slowed down. The market crash also raises some practical questions about the feasibility of the Colorado and Utah approaches.
Utah’s program prohibits risking government money while converting cryptocurrencies to US dollars. Finding a provider to absorb the risk can be challenging, said John Valentine, chairman of the Utah State Tax Commission.
“I do not know what they will find when they enter the marketplace,” Valentine said. “Markets need to be very effective at scoring their risks. With the uncertainty in the cryptocurrency markets right now, I think it’s going to be harder to find a third-party provider than when it was more stable a year ago.”
Payment service providers that specialize in cryptocurrencies insist that they can fulfill these obligations with minimal risk to states.
“At the end of the day, you want to give your citizens as many payment options as possible,” said Merrick Theobald, vice president of marketing for Atlanta-based BitPay. “And there’s no better way to shop online than with cryptocurrency. It’s a great digital payment method.”
Solves no problems
Tax lawmakers predicted few states would follow Colorado and Utah. Offering cryptocurrency tax payment programs solves no inherent problems for taxpayers or government revenue departments, and is likely to create new ones, said Omri Marian, a professor of tax law at the University of California-Irvine School of Law.
Marian said that paying taxes from a digital currency wallet will qualify as a tax realization event that triggers either a capital gain or loss at both the state and federal levels. Accounting for these incidents “creates a new compliance burden for taxpayers and a new administrative and enforcement headache for the tax authorities,” he said.
He also dismissed programs that require third-party conversion and clearing, arguing that these processes would leave revenue agencies with new layers of complexity and expense to do something simple, efficient and inexpensive when trading in US dollars.
Given the tax policy issues at stake, Marian said, Colorado and Utah-style programs will only be enacted in jurisdictions ruled by lawmakers living under the spell of crypto evangelists.
“States have absolutely nothing to gain from this,” he said. “It’s a pretty pathetic attempt to look cool with crypto bros. When it comes to tax policy, it’s just stupid.”