Crypto Tax by State: A Review of State Regulations

Cryptocurrency’s integration into the economy presents new tax challenges. While the federal government has established baseline rules for how these digital assets are taxed, the approach can differ at the state level. This article explores the nuances of state-level cryptocurrency taxation, providing clarity on how various jurisdictions handle this modern asset class.

The Federal Framework for Cryptocurrency Taxation

The Internal Revenue Service (IRS) provides the foundational rules for cryptocurrency taxation in the United States, and understanding this federal framework is the starting point for any state-level analysis. In its Notice 2014-21, the IRS clarified that it treats virtual currencies as property for tax purposes, not as foreign currency. This classification means the principles that apply to transactions involving stocks or real estate also apply to digital assets like Bitcoin and Ethereum, requiring taxpayers to track their activities and report gains or losses.

This “property” designation means that several types of transactions are considered “taxable events.” These occur when you dispose of your cryptocurrency, including selling it for U.S. dollars, exchanging one type of crypto for another, or using it to purchase goods and services. The gain or loss is calculated as the difference between the fair market value of what you received and your “cost basis” in the crypto you gave up. The cost basis is the price you paid to acquire the asset, including any fees.

The tax rate applied to any profit depends on how long you held the asset. A short-term capital gain, from an asset held for one year or less, is taxed at your ordinary income tax rates. A long-term capital gain, from an asset held for more than one year, is taxed at preferential rates of 0%, 15%, or 20%, depending on your total taxable income. All of these transactions are reported on Form 8949 and then summarized on Schedule D of your federal tax return.

It is also important to recognize non-taxable events. Simply purchasing cryptocurrency with U.S. dollars and holding it is not a taxable event. Likewise, transferring crypto between wallets that you own does not trigger a tax liability. Receiving crypto as a bona fide gift is also not immediately taxable to the recipient; tax is deferred until the asset is later sold or exchanged.

State Income Tax Approaches to Cryptocurrency

While federal law sets a baseline, the application of income tax to cryptocurrency gains varies significantly across the United States, creating a patchwork of regulations. Taxpayer obligations depend on their state of residence and whether that state has an income tax and has issued its own specific guidance.

States with No Personal Income Tax

The most straightforward approach to state-level crypto taxation exists in states that do not levy a personal income tax. For residents of these states, there is no state income tax on capital gains from cryptocurrency transactions, though they must still calculate and pay federal taxes.

These states include:

• Alaska
• Florida
• Nevada
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

New Hampshire also does not tax earned income. While it historically taxed interest and dividend income, that tax has been repealed. As a result, crypto capital gains are not subject to a state income tax in New Hampshire.

States That Follow Federal Treatment

The vast majority of states that have a personal income tax have not issued specific guidance on cryptocurrency and conform to the federal tax treatment. The starting point for most state income tax returns is the federal Adjusted Gross Income (AGI), which already includes any net capital gains or losses from crypto transactions reported on your federal Schedule D.

States like California, Massachusetts, and Georgia fall into this category. Residents in these states will see their federally calculated crypto gains taxed at their state’s ordinary income tax rates or specific capital gains rates, if applicable.

States with Specific Guidance or Unique Interpretations

A smaller but growing number of states have issued their own administrative rulings, bulletins, or guidance that clarify or modify the tax treatment of cryptocurrency. Pennsylvania, for instance, has issued specific guidance through a letter ruling that treats cryptocurrency as personal property. This has implications for inheritance tax, making crypto assets subject to it.

For sales tax purposes, the state has clarified that the purchase of cryptocurrency itself is not subject to sales tax, but using it to buy taxable goods or services is. New York has one of the most distinct regulatory frameworks, primarily through its Department of Financial Services (NYDFS). While its “BitLicense” regime governs virtual currency businesses, New York tax guidance follows the federal treatment of crypto as property. The state’s active role in regulation means taxpayers should monitor any specific bulletins from the New York State Department of Taxation and Finance.

Sales and Use Tax Implications at the State Level

Beyond income tax, cryptocurrency transactions can trigger sales and use tax obligations, a separate domain of taxation that depends on state and local laws. The application of these taxes revolves around two distinct scenarios: using cryptocurrency to purchase tangible goods or services, and the purchase of the cryptocurrency itself.

When a consumer uses cryptocurrency to buy a taxable item, such as electronics, states with a sales tax treat this as a barter transaction. The tax is calculated on the fair market value of the item being purchased at the time of the transaction, expressed in U.S. dollars. The retailer is responsible for collecting this sales tax and remitting it to the state, just as if the payment were made with cash or a credit card.

The challenge for the consumer in this scenario is that they must have enough value in their crypto to cover both the purchase price and the sales tax. This single transaction also creates an income tax event, resulting in a potential capital gain or loss.

The other question is whether the act of purchasing cryptocurrency itself is a taxable sale. In most jurisdictions, the purchase of cryptocurrency is not subject to sales tax. This is because most states classify cryptocurrency as an intangible asset, and sales taxes are levied only on tangible personal property and certain enumerated services.

This is not a universal rule, and some states have provided specific guidance. Washington State, for example, has issued a determination clarifying that the sale of digital currencies is not subject to its sales tax because they are considered intangible property.

Using Cryptocurrency to Pay State Tax Liabilities

A developing area in state tax administration is the ability for taxpayers to remit their tax payments using cryptocurrency. This does not change how the tax is calculated but offers a new method for settling the liability. While the concept has been discussed in several state legislatures, very few have implemented a functional system.

Colorado became the first state to officially accept cryptocurrency for tax payments in 2022. The system allows individuals and businesses to pay a variety of state taxes, including personal and corporate income tax, and sales and use tax. The state itself does not directly take custody of the digital assets; instead, payments are facilitated through a third-party payment processor. The processor converts the cryptocurrency to U.S. dollars and remits the dollar amount to the Colorado Department of Revenue, charging the taxpayer a fee for this service.

Before Colorado’s program, Ohio had a similar initiative called OhioCrypto.com, which launched in 2018. It allowed businesses to pay certain taxes using Bitcoin. However, the program was suspended in 2019 after the state’s Attorney General raised questions about the legality of using a third-party processor in the manner it was structured. The Ohio experiment highlights the legal and procedural hurdles states must clear to implement such systems successfully.

State-Specific Reporting and Filing Guidance

After calculating cryptocurrency gains and losses according to federal rules, taxpayers must correctly report this information on their state income tax returns. The specific mechanics of this reporting process depend on the state’s tax forms and its degree of conformity with the federal system.

Some states may require additional detail or have specific schedules for reporting capital gains. Even if a state starts with federal AGI, it may require taxpayers to attach a copy of their federal Schedule D to the state return.

In rare instances, a state might have a unique schedule for reporting certain types of income that could include cryptocurrency. It is the taxpayer’s responsibility to obtain the correct and most current forms from their state’s department of revenue website. These websites are the official source for tax forms, instructions, and any specific announcements related to the tax treatment of assets like cryptocurrency.