Did Any Coloradans Pay Their State Income Taxes in Crypto?

This year’s Tax Day isn’t just the deadline for individuals to submit income tax returns and their associated payments. It also marks the closing of a unique tax season in Colorado history: the first in which the state accepted digital assets.

Last September, Governor Jared Polis kicked things off when he announced that, effective immediately, Colorado would begin accepting cryptocurrencies as payments for a number of different taxes, most notably state income taxes. The move wasn’t entirely surprising for Polis, who has been a noted fan of blockchain technology since before he became Colorado’s governor and who has since made multiple appearances at ETHDenver, the annual crypto conference that’s hosted in the Mile High City.

What is surprising is just how few Coloradans actually did it: As of April 14, only 11 people paid their state income taxes using crypto, according to the Colorado Department of Revenue. Of the roughly 3.1 million individual tax returns Colorado can expect to receive this year, that represents just 0.00035 percent. To put that return rate into context, a person faces roughly the same odds of getting struck by lightning in a year as the state of Colorado had in receiving a tax payment in crypto.

Colorado uses PayPal to handle all cryptocurrency payments from taxpayers, which converts users’ crypto into U.S. dollars before it hits the state treasury. Hence, Carr says, no risk to the state.

But according to a couple of experts in Colorado’s cryptocurrency community, PayPal is the problem—and it’s why hardly anyone paid their taxes in crypto this tax season.

“Most people I know won’t use PayPal,” says John Paller, founder of ETHDenver. “Crypto is supposed to decentralize our commercial activities, not replicate old systems with new payment assets. The fact that there are additional steps doesn’t make any sense, and we have provided this feedback to Governor Polis.”

The extra steps that Paller is referring to stem from the fact that PayPal introduces fees and requires additional actions on the part of taxpayers. To start, PayPal adds a surcharge of between 1.5 and 1.8 percent on top of all crypto payments, so there’s an additional expense. Crypto users must also take the step to either buy crypto on PayPal or transfer assets into PayPal from other digital wallets (and transfers have fees, too). And crypto enthusiasts say that perhaps the most significant issue with PayPal is that the platform only accepts four kinds of currencies—Bitcoin, Bitcoin Cash, Litecoin, and Ethereum—and all of those have values that fluctuate wildly with the market.

Bitcoin, for example, was valued at around $20,000 last September when Polis announced the crypto tax option, but is currently hovering around $30,000. That means that, if it was used to pay, say, a $1,000 state tax, the taxpayer would need roughly 0.033 Bitcoin today. But if you tried to pay that same $1,000 state tax last September when Bitcoin was valued a third lower? You would have needed 0.05 Bitcoin.

Tom Koceja, a Greenwood Village–based accountant who specializes in crypto taxes, says most of his clients prefer to pay for services (including paying him) using a different kind of cryptocurrency called stablecoins, many of which mimic the U.S. dollar and are pegged to $1 each. The other class of fluctuating cryptocurrencies, like the four that PayPal accepts, necessitate a gain or loss calculation because PayPal essentially sells the asset when users make a payment, Koceja says.

In other words, there could be an additional capital gains tax. If the crypto asset has appreciated in value since the time a user originally bought it—say, Bitcoin that’s gone from $20,000 to $30,000—that filer is subject to capital gains tax when PayPal sells the asset during a payment transaction. “And most people aren’t going to pay in [a currency] that creates another tax obligation for them,” Koceja says.

And if an asset has depreciated? A person might also be reluctant to sell it at a loss (which, following a down year for crypto last year, could explain why so few Coloradans paid their state taxes in crypto).

Like Paller of ETHDenver, Koceja says the state’s system needs improvement in order to increase participation among crypto users. “It’s convoluted,” he says of the current option. But of the future, the accountant says, “I think it’s cool that the Department of Revenue did this. To see them start this is neat.”

With some changes, he adds, he thinks Colorado will see more crypto users pay their taxes in blockchain assets. “I think with payment in stablecoins, more marketing around it, and maybe a wallet address [operated by the state] where people could directly send their crypto, we’re not that far off,” he says. And pretty soon, Koceja says it won’t just be Colorado that we’re sending stablecoins to to pay for things like income taxes. “You’re going to see this kind of thing all over the place, and it’ll be preferable,” he promises.