Colorado is now accepting cryptocurrencies as payment for any taxes owed to the state as of Sept.1. It has been possible thanks to Colorado Governor Jared Polis’s promise to make the state a pro-cryptocurrency one. However, if you pay taxes this way, the amount you owe may change.
In fact, Colorado is not the only state that is trying to stimulate crypto investment within its borders. Governments in Arizona, Utah, and Wyoming have already introduced legislation allowing them to receive tax payments using cryptocurrencies in different degrees.
States that accept blockchain and build the crypto sector may gain substantial economical benefits. Experienced officials are starting to promote their areas as the next crypto economy centers. They expect such measures will attract new businesses and young, wealthy, and intelligent voters enthusiastic about crypto.
Anyway, citizens should be warned of the tax consequences when they pay taxes with digital currencies. For instance, making such a payment is taxable, so it can potentially increase your amount of taxes.
To succeed in accepting cryptocurrencies as tax payment, other states should understand the tax difficulties that come with crypto payments and be prone to accepting stablecoins as a payment method.
States receiving crypto tax payments face several issues. For example, paying state taxes with digital currencies is considered taxable disposal for individuals, which means a payment activates its own income event.
The IRS regards digital currencies as property. Thus, if the price of the cryptocurrency you use to pay taxes increases, then you will have taxable income equal to the difference between the price you bought the crypto at and its increased value.
It is important to note that when citizens pay their tax bills in full using cryptocurrencies, it triggers another taxable event for the next tax year. For instance, you are to pay $5,000 as taxes this year. You use Bitcoin to pay your 2022 taxes by the due date, April 15, 2023. Let’s say that you bought this Bitcoin for $1,000, so you earned $4,000 by getting rid of it. Now you have to pay tax on your $4,000 profit for the 2023 tax year.
The majority of people who are invested enough to be willing to use digital currencies as their primary means of payment are liable to have grown rich in crypto. These people may have doubts about using their cryptocurrencies with the increased value to pay state taxes to stay away from the extra tax.
If people who have the ability to pay state taxes in crypto are not expected to do so, then states may discover that their initiatives will hardly get the predicted reaction. Therefore, these programs may become more high-cost than they really are.
At present, you can use only “Cryptocurrencies Hub” by PayPal to pay taxes with crypto in Colorado. Unfortunately, it does not support stablecoins as a means of payment. If the U.S. enables paying with stablecoins, then cryptocurrency payments can potentially become popular with citizens over the entire country.
Crypto tokens tied to the US dollar price take tax out of context when it comes to paying with digital currencies. Even though you still need to report the disposal of stablecoins on your tax return, their value is not prone to fluctuations. In this case, any amount of profit or loss is expected to be zero or a few dollars maximum, which means it will not sufficiently influence the amount of taxes you have to pay.
Obviously, when you convert any cryptocurrency into a stablecoin, it is considered a taxable transaction by its very nature. Nevertheless, the more mature the crypto environment may become, the more common it will be for crypto natives to keep a substantial amount of stablecoins in their overall portfolio.
These crypto natives treat cryptocurrencies and decentralized finance as a replacement for the bank system. It seems possible that in this alternative system individuals will keep a certain quantity of liquid assets to make payments, involving paying state taxes.
When it comes to using stablecoins and there is no tax bill included, paying state taxes in cryptocurrencies will possibly gain the popularity it deserves. Hence, citizens may consider crypto tax payments to be the top ones.
When the U.S. approves the usage of cryptocurrencies, particularly stablecoins, for making tax payments, and implements them accurately and successfully, then the USA will potentially become centers of the crypto economy and get increased profits from the burgeoning economic sector.
Nobody knows whether Colorado and other states will succeed in enabling crypto tax payments or whether the tax consequences will kill probable passion for such government programs.
So, let’s hope the U.S. is going to adopt stablecoins, and support their initiatives. Blockchain has a strong potential to impact the future functioning of our authorities. To use blockchain technology to protect our elections, the officials are to succeed in adopting crypto tax payments first.