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

Colorado is hoping to become more crypto friendly with a new tax proposal, but investors should understand the complications

article-image

Colorado Governor Jared Polis | Source: Western Area Power

share

key takeaways

  • Colorado is hoping to accept tax payments in crypto by the end of this summer
  • Paying taxes in an appreciating asset can get complicated, experts warn

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.”


Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.

The Lightspeed newsletter is all things Solana, in your inbox, every day. Subscribe to daily Solana news from Jack Kubinec and Jeff Albus.

Tags

Upcoming Events

Salt Lake City, UT

WED - FRI, OCTOBER 9 - 11, 2024

Pack your bags, anon — we’re heading west! Join us in the beautiful Salt Lake City for the third installment of Permissionless. Come for the alpha, stay for the fresh air. Permissionless III promises unforgettable panels, killer networking opportunities, and mountains […]

recent research

Screenshot 2024-05-23 091855.png

Research

Bitcoin L2s aim to boost scalability while preserving decentralization and security, unlocking a better user experience, and new avenues for Bitcoin-powered innovations. However, no existing Bitcoin L2 leverages the full security of Bitcoin.

article-image

Right now, crypto platforms and custody services live in the shadow of a legacy of security failures — and it shouldn’t be that way

article-image

The current crop of ETF issuers could’ve only made it this far by promising not to stake any ETH they hoover up

article-image

After accelerating conversations with issuers, the SEC took a step toward allowing ETH funds to launch

article-image

As FIT21 advances to the Senate, experts are cautiously optimistic but say to expect some changes to the bill

article-image

Three Democrats joined Republicans Thursday in supporting a bill that would block the Federal Reserve from issuing a retail CBDC

article-image

Plus, Zeta Markets has released a litepaper for the “Zeta X” layer-2 it’s hoping to send to mainnet in early 2025