Colorado’s Plans To Accept Tax Payments in Crypto Could Be Rocky for Investors

Years after becoming the first state to use blockchain technology in government infrastructure, Colorado is looking to accept cryptocurrencies for tax payments, its governor announced Wednesday.

“We are touting Colorado as the center of the crypto economy,” Colorado Governor Jared Polis said in an interview ahead of the ETHDenver conference Wednesday.

“We have not only very favorable laws and rules, but we also have a great ecosystem of innovation here.”

The state hopes to accept cryptocurrencies for state tax payments and other state transactions, such as permit or license payments, by the end of this summer, Polis said. Colorado will have to partner with a crypto company to accept and convert the cryptocurrencies, he added.

“Our budget is still in dollars, our expenditures are still in dollars, and, of course, we don’t want to take the speculative risk of holding crypto, so we will be having a transactional layer there,” the Democrat said. “It will be entering our systems as dollars.”

“For consumer convenience, we want to accept payments in a wide variety of cryptocurrencies.” 

For Colorado citizens looking to use crypto for their tax obligations, it could get complicated, some tax experts point out.

“Colorado’s plan to accept crypto currency for state tax payments and other government fees is proof of crypto’s wide acceptance as both an investment and payment method,” Kell Canty, CEO of Ledgible, said. “Of course, using crypto to pay taxes does not change the tax treatment of the transaction for federal income or state income tax purposes.”

The taxpayer will be responsible for keeping track of these transactions and determining tax obligations, legal experts said.

“The challenge is principally borne by the taxpayers, for whom the disposal of crypto is a tax event which will create a gain or loss that needs to be accounted for in the following tax year,” said Preston Byrne, partner at law firm Anderson Kill.

Paying taxes with crypto creates more tax implications for citizens, Shehan Chandrasekera, head of tax at CoinTracker, agreed.

“If you are spending appreciated cryptocurrency to pay taxes, that will trigger more capital gains — a never-ending cycle,” he said. “Spending an appreciating asset for something like taxes is not wise, in my opinion.”

Citizens looking to pay taxes with crypto are going to have to be very careful about where these funds are coming from, said Jordan Bass, owner of Taxing Cryptocurrency.

“It could potentially be easier to make large payments over crypto versus sending a check, maybe for someone that lives mostly on-chain it would make sense,” Bass said. “It sounds cool, making Colorado more blockchain friendly, but I see this as maybe only benefiting a select few.”

Polis’ tax announcement comes on the heels of several initiatives in Colorado to increase blockchain-driven solutions in government.

“The city of Denver held, I think it was — at least in the United States — the first election with blockchain technology for our overseas ballots,” Polis said.

“We believe this is a big solution on privacy, as well as on efficiency, and we’re very excited about what that means for empowering people to control their own information.”

Colorado’s lower taxes and more lenient crypto-related regulatory guidelines make the state attractive to digital asset companies, Polis added.

“We are pushing back against the feds wherever we can around creating the opportunity for innovation in this sector,” he said. “The state is an asset in terms of defending the rights and freedoms of people rather than infringing on them.”

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