Crypto Could Be Viable Tax-Payment Method With Proper Education

Several states—including Colorado, Utah, Louisiana, Ohio, and Arizona—have begun accepting, or introducing legislation to accept, cryptocurrency for tax payment of taxes or other fees. More states should follow suit.

But states still need to overcome a range of challenges, such as crypto price volatility, regulatory hurdles, security risks, public trust, and tax consequences. States could turn cryptocurrency into a viable payment method by using stablecoins, collaborating with the federal government, partnering with third-party payment processors, and educating the public.

Volatility and unpredictability. Cryptocurrencies are known for their price fluctuations, often by large margins within short periods of time. For example, Bitcoin’s price fell from $64,000 on Aug. 26 to $54,000 on Sept. 7, a significant drop in less than two weeks. The price then went back up to $64,000 about two weeks later.

These swings could cause unpredictability for states with tight budgets and public spending obligations. Even though the payment processor used by the state can convert crypto into US dollars at the time of payment, the value of crypto could change between the time tax is assessed and when payment is made.

To minimize the impact of price fluctuations, states can require the use of stablecoins such as USD Coin and Tether, which are pegged to US dollars, for taxpayers who opt to pay by crypto. Stablecoins are easy to use and manage, and their transaction fees are often lower than those of other cryptocurrencies.

Regulatory and security concerns. The crypto market is still relatively under-regulated compared with traditional investment vehicles such as stocks and mutual funds—and there are significant enforcement gaps.

Cryptocurrencies are more prone to fraud, money laundering, and hacking than traditional investment assets. This is because crypto transactions are often anonymous, lack rigorous regulatory oversight, and are irreversible—which makes it harder to trace or recover stolen funds. In addition, crypto’s global accessibility and the complexity of blockchain technology can leave users vulnerable to scams or phishing.

States can collaborate with the federal government to establish clear regulatory standards about using crypto for payment, create joint task forces to monitor illicit activities, and provide consumer protection guidelines to prevent fraud and scams.

Additionally, states should implement strong security measures such as using robust encryption and multi-factor authentication to secure transaction processes, establishing real-time monitoring systems to detect suspicious activities, and adopting blockchain audit trails to ensure transparency and traceability of crypto payments.

Infrastructure for accepting payments. States would need to build crypto payment systems or partner with third-party crypto payment processors to have the proper infrastructure. Integrating crypto payment methods with existing government systems may require custom solutions or substantial system upgrades. For example, states would need to employ blockchain technology, establish secure digital wallets, and implement a crypto payment gateway.

States that accept crypto for tax payments currently use a third-party payment processor to handle payments, and taxpayers usually must bear the processing fees. States can consider setting up their own wallets to accept stablecoins, which can help reduce transaction fees.

Education and public trust. News reports on crypto scams, as well as the bankruptcy of crypto exchange FTX, may sow distrust of crypto among taxpayers. To help convince more taxpayers to use crypto to pay taxes, states must implement education campaigns. Taxpayers would need clear guidance, such as how-to guides and crypto transaction tutorials.

Limited use and adoption. Today, cryptocurrency functions primarily as an investment asset rather than a payment method. States currently accepting crypto for payments are limiting the usage to a small area—e.g., tax payments in Colorado and Utah and services under the Louisiana Department of Wildlife and Fisheries.

States should accept crypto for a broader range of purposes, such as for other government services and fees. For example, by allowing crypto for services such as licenses and fees, states could attract tech-savvy users and blockchain companies. This would help position a state as a leader in digital innovation and promote its economic growth.

Tax consequences of crypto payments. The IRS classifies crypto as property and specifies that spending crypto is a taxable event, which could trigger capital gains taxes. If someone’s crypto appreciated in value between when they purchased it and when they used it to pay taxes, they would have to pay additional taxes. This extra layer of complexity and cost might be discouraging.

States should consider issuing guidance on reporting crypto transactions for tax purposes to alleviate taxpayer concerns and confusion. Offering the use of stablecoins for payment would allay taxpayers’ worries about capital gains taxes, as price changes for stablecoins are generally minimal.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Sharon Yip is a co-founder and CEO of Chainwise CPA, a boutique firm specializing in crypto tax services.

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