Is Bitcoin the Future of State Income Tax Payments?

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By Brenna Goth

States may start boosting Bitcoin, Litecoin, and other digital currencies by giving them a place in a system most residents encounter every year: paying income taxes.

Cryptocurrencies could be the newest form of payment accepted in Arizona and Georgia if pending legislation is approved. Bills in both states would elevate some of them to the status of U.S. dollars when it comes to paying taxes.

Advocates say the change would signal support of financial technology and help states lead in a growing industry. But the plans have raised controversy and questions, including what risks revenue departments could bear.

The proposals come as states throughout the country grapple with how to regulate or recognize cryptocurrencies. At least 19 states have introduced digital and virtual currency legislation this year that ranges from tax policy to creating task forces, according to the National Conference of State Legislatures.

Federal treatment and taxes significantly impact how people use the decentralized, peer-to-peer systems. States, though, could emerge as leaders in developing infrastructure like payment gateways, said Dragan Boscovic, director of the Blockchain Research Lab at Arizona State University.

The lab, which focuses on the digital ledger system behind bitcoin and other technology, receives funding from the cryptocurrency Dash.

“Somebody needs to be first, so I don’t see risk except having to explain to others why it makes sense,” Boscovic told Bloomberg Tax.

Advocates Argue Convenience

Arizona’s cryptocurrency income tax bill, S.B. 1091, would give people an easy and convenient way to pay their taxes, sponsor Sen. Warren Petersen (R) said. The bill passed the Senate this month and awaits a vote in the House of Representatives.

If approved, a taxpayer could pay the state in Bitcoin, Litecoin, or other cryptocurrencies recognized by the Arizona Department of Revenue starting in 2020. The department would instantly convert the payment into U.S. dollars and credit the taxpayer, minus any fees or other costs.

That system eliminates the risk of currency volatility or other issues that would impact state revenue, Petersen said during debate over the bill. The revenue department would need to create special systems to accept the new currency if the bill becomes law, spokesman Ed Greenberg told Bloomberg Tax.

Similarly, Georgia’s S.B. 464 would require the state revenue commissioner to accept cryptocurrencies. The measures provide that the state would convert the payments into U.S. dollars within 24 hours.

The proposals signal openness to new technology, though it’s hard to predict how many people would use cryptocurrencies to pay their income taxes, Boscovic said. It will likely be a small fraction of overall tax collections, he said.

“It does put you in a leadership position,” Boscovic said.

‘Good Old American Dollars’

Some tax experts, though, question the benefit of a change that could burden states. It’s hard to see tangible benefits for revenue departments or taxpayers, said Omri Marian, a professor of law at the University of California, Irvine School of Law, who looks at cryptocurrency tax issues.

States would have to develop the systems to accept digital money. And deciding which cryptocurrencies to accept opens them to a host of legal issues, Marian told Bloomberg Tax.

“Frankly, I do not understand what this achieves,” he said.

Some Arizona legislators echoed his concerns, asking why the state would accept Bitcoin but not Euros or other currencies. It also gives the strapped Department of Revenue another duty, Sen. Steve Farley (D) said while discussing the bill.

“I think we should be sticking to good old American dollars,” he said.

Cryptocurrency also raises concerns for its role in crimes like money laundering, said Kenneth Rogoff, professor of economics at Harvard University and author of “The Curse of Cash”. A state might know who paid income taxes in Bitcoin—but not who sold the bitcoin to that person.

Successful legislation could give cryptocurrencies a price boost now but go against eventual federal regulations, Rogoff told Bloomberg Tax.

“I tend to think in the long run we will absolutely not see what Arizona is doing,” he said.

Raises Tax Questions

States looking to legitimize cryptocurrency have other options, Marian said, including how they tax them.

Wyoming, for example, is weighing S.F. 111 to exempt cryptocurrencies from state property taxes. Another Arizona bill that has faced some opposition, S.B. 1145, would prevent capital gains taxes on cryptocurrency.

The steps are part of the limited actions states can take considering federal cryptocurrency taxes that limit day-to-day use, Marian said. Some members of Congress are pushing for transaction exemptions.

Regulators could also weigh other cryptocurrency tax issues this year, such as whether a bitcoin “fork,” or split, is a taxable event, Marian said.

To contact the reporter on this story: Brenna Goth in Phoenix at bgoth@bloomberglaw.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

For More Information

Text of S.B. 1091 is at http://src.bna.com/wGY.

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