Cryptoasset issues in state and local taxation

In the past few years, more merchants have started accepting cryptoassets as payment and several states are looking into possibly accepting them as payment for taxes. However with this, states must also address issues concerning cryptoasset transactions across multiple tax types including income taxation and sales taxation.

For federal income tax purposes, the IRS considers cryptoassets to be property, potentially, a capital asset of the taxpayer. Accordingly, the rate of tax paid on capital gains or the ability to  deduct capital losses is affected by the holding period of the cryptoasset. 

Only a few states have either enacted direct legislation or issued direct guidance regarding the income tax treatment of cryptoassets, although most states follow federal treatment and consider cryptoassets to be property instead of currency.

When it comes to apportionment of cryptoasset activity across state lines, some states treat it similar to sales of services — either using a market-based method (based on where the customer receives the service) or a cost-of-performance method (based on where most of the costs are incurred to affect the sale).

Other states may treat these assets in a comparable manner to how they apportion sales of tangible personal property, assigning those sales to their destination.

When cryptoassets are used to purchase taxable goods or services, a key issue to consider is how the state where the transaction is taxed determines the sales price of the purchased item or service. 

Although many states have yet to provide guidance, most states have issued instructions saying sales tax should be determined based on the value of the cryptoasset in U.S. dollars at the point the transaction occurs. Thus, sellers that don’t immediately convert cryptoassets received into cash will need to maintain accurate records to track historical valuations.

All in all, cryptoassets are here to stay. Accordingly, practitioners should continue to monitor emerging guidance in the coming months and years, particularly as it relates to the various tax types covered under the umbrella of state and local taxation.

Scott Brawdy, CPA, is a principal with Honkamp, P.C. Mr. Brawdy can be reached at scott.brawdy@honkamp.com.