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Cryptocurrency has often been touted as the money of the future. This digital currency has created a lot of buzz in the finance world as investors and traders have scored big – and suffered big losses – from buying and selling different forms of cryptocurrency. As the world becomes more tech-friendly, making payments using crypto is also becoming more common.
Many US states have considered accepting cryptocurrency tax payment, but Colorado is the first to take the plunge. Colorado Governor Jared Polis recently announced the groundbreaking news, shaking up the tax scene by giving taxpayers the option to pay state taxes using cryptocurrency and allowing many residents to save on credit card transactions.
Polis proposed the idea of using crypto to pay state taxes Earlier in 2022, but it took time for the idea to become a reality. Tax payments made with crypto are accepted only through PayPal's Cryptocurrency Hub platform, which adds fees including a $1.00 service fee and a charge of 1.83% on the payment amount. Payments are only accepted from a single personal account using a single cryptocurrency and not from PayPal business accounts. Payment is considered to be effective the day it's initiated through PayPal, but the transfer takes three to five days to process.
Colorado residents can use the currency to pay for a variety of taxes including withholding, sales and use, personal and business income, excise fuel and severance. The state has what’s considered pro-crypto legislation and passed the Colorado Digital Token Act in 2019, allowing cryptocurrencies an exemption from certain security regulations.
“As a state, we're on the forefront of digital innovation,"Polis said in an interview, "whether it's applying blockchain and shared-ledger technology as a new model for funding, or whether it's simply being consumer-friendly and making sure that we allow for the kind of innovation that will disrupt legacy business practices and government practices to make them more efficient."
Colorado plans to convert cryptocurrency payments into dollars, rather than holding onto it.. As a taxpayer opting to pay taxes using cryptos, you should expect additional fees in the future as the payment process evolves. You’ll also be responsible for keeping track of every transaction and figuring out your tax obligations. FlyFin’s crypto calculator can be a huge help in finding out how much cryptocurrency you have to use for paying taxes.
One important aspect to consider is the fees associated with crypto payments. There are conversion fees, fees for using the platform and even fees when you make the payment. So the amount you originally planned to pay could be a lot higher once you add up all the fees. Using crypto might end up being the more expensive option.
Crypto also has certain rules and regulations when it comes to taxes. Making a payment using crypto is seen as selling your crypto. Because it's considered to be a sale, you'll also need to pay capital gains tax.
In down times, every asset class is strongly correlated with the others. Investors thought of crypto as a safe asset but its value recently nosedived in the same way the US stock market went down. Meanwhile, government bonds and interest rates have gone up, and crypto trading has reached its lowest price for 2022.
If you bought crypto during its peak time and planned to hold onto it for the long term, it might go against your financial goals to pay your taxes in crypto now.
While using cryptos to pay taxes isn’t for everyone, it gives residents another way to pay their taxes and is more evidence that the world is moving in the direction of crypto. Colorado may very well be paving the way for other states to follow.
FlyFin CPA Team
With a combined 150 years of experience, FlyFin's CPA tax team includes tax CPAs, IRS Enrolled Agents and other tax professionals, offering users the most comprehensive tax advice and preparation.