Colorado is the only state currently accepting cryptocurrencies as payment for state taxes. According to the Colorado Department of Revenue, individual income tax, business income tax, sales and use tax, withholding tax, severance tax, and excise fuel tax are eligible.
Cryptocurrencies don’t have a central issuing or regulating authority, instead using a decentralized system to record transactions and issue new units. Cryptocurrencies are stored in digital wallets.
The state is working with a third-party vendor to convert the crypto into dollars before it goes to the state’s treasury. Colorado will not issue tax refunds in crypto, as the state does not hold cryptocurrency on its balance sheet.
The Colorado Department of Revenue accepts cryptocurrency payments through the PayPal Cryptocurrencies Hub, where taxpayers will be able to select their desired cryptocurrency for tax remittance.
According to the Colorado Department of Revenue:
A sufficient amount of cryptocurrency to cover the tax, obligation and fees is converted to dollars and remitted to DOR to complete the online transaction. Service fees include an additional $1.00 plus 1.83% of the payment amount. You must have the entire value of your invoice in a single cryptocurrency in your PayPal Cryptocurrencies Hub. Effective on the date initiated, USDs will transfer in 3-5 business days. +-
PayPal purchase fees or miner/gas fees may apply when transferring cryptocurrencies from an external wallet to your PayPal Cryptocurrencies Hub.
At this time, only PayPal Personal accounts can pay using cryptocurrency. PayPal Business accounts cannot pay using cryptocurrency. Transfers from external wallets to your PayPal wallet must be done via the PayPal mobile app.
There may be tax implications for residents choosing to pay taxes using cryptocurrency. That’s because the IRS classifies cryptocurrency as property, and transactions are taxable by law, just like transactions related to any other property.
As taxes are due when one sells, trades, or disposes of cryptocurrency in any way and recognizes a gain, Coloradans remitting state taxes using crypto may need to pay capital gains tax.