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Colorado Becomes The First US State To Accept Bitcoin For Tax Payments

Colorado Becomes The First US State To Accept Bitcoin For Tax Payments

Explainers

01 Nov 2022

The nascent baby crypto has indeed come a long way. Long enough that Colorado recently announced itself as the first US state to support Bitcoin as tax payments.

Vitalik Buterin, the infamous Ethereum co-founder, once said, “Cryptocurrency is still this nascent baby where lots of crazy things that are typically associated with nascent baby concepts are playing out.”

While this is still true, some cryptocurrencies that have matured are entering their teenage puberty years – most notably, Bitcoin (BTC) and Ethereum (ETH). Nowadays, we are seeing crypto adoption across big brands, companies, and governmental institutions. For example, Tesla is now accepting Dogecoin as payment.

The nascent baby crypto has indeed come a long way. Long enough that Colorado recently announced itself as the first US state to support Bitcoin as tax payments. The tax policy took effect starting September 1, 2022, allowing all state residents to pay their personal income tax, business income tax, severance tax and withholding tax with crypto.

The policy was introduced following Governor Jared Polis’ appearance on CoinDesk TV, where he outlined his plans to accept crypto for tax payments by the end of summer. Colorado, however, is not the first state to attempt legitimizing cryptocurrency payments. Legislatures in Arizona, Wyoming, and Utah have all previously introduced bills to accept tax payments with crypto.

The news is yet to convince the majority due to the limitations set for using crypto for tax payments. According to the Internal Revenue Service (IRS), cryptocurrency is viewed as property because it fluctuates in price. This means that if the price of the crypto you’re using to pay your taxes appreciates over time, you have taxable income equal to how much it’s appreciated. For example, if Jack were to pay his taxes in crypto, the payment itself becomes a taxable event and potentially increases the amount of tax Jack has to pay.

An Alternative: Stablecoins

For an asset class that hasn’t been around nearly as long as any other asset class in the economy today, being accepted for tax payments is huge. While we hope for more states to follow Colorado’s lead, there are still many obstacles standing in the way of actually incentivizing residents to make use of such policies.

For states, the benefits are clear – advocate crypto, attract new businesses and talent,and create a crypto economy. But from a residents’ perspective, they’re not going to want to actively choose to use a means of payment if it piles on additional costs.

To date, Colorado exclusively accepts crypto tax payments via PayPal’s “Cryptocurrencies Hub,” which only supports Bitcoin, Bitcoin Cash, Ethereum, and Litecoin. Aside from the possibility of increased taxable income, PayPal charges a service fee of $1 plus 1.83% of the payment amount. Overall, the cost of paying tax in crypto is higher than doing so in USD.

As an alternative solution to this dilemma, some have suggested that states begin accepting stablecoins rather than just cryptocurrencies as tax payments. Stablecoins don’t materially fluctuate in value and will eliminate the risks in the scenario associated with asset appreciation. Gains or losses would likely be zero or near zero and won’t significantly impact the amount of taxes that residents have to pay.

If states decide to accept stablecoins as payment, there is a better chance for crypto payment policies to succeed in the future. Many crypto natives often hold stablecoins as part of their portfolio. As the ecosystem matures further, a significant amount of crypto portfolios will likely be stablecoins as they provide available liquidity.

Where To From Here?

It’s hard to tell where this ‘crypto as payment’ movement will head in the coming years. Perhaps crypto degens are looking to fast-pace mainstream adoption and will take the lead by example. But as mentioned, crypto is still in its early years – despite having reached many milestones at an accelerated pace, it still has a long way to go.

For states and countries to lock down such policies, they need to be able to incentivize their residents to act and actually make use of them.

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