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The Tax Implications of Cryptocurrency Use

March 28, 2023

By Carol G. Kokinis-Graves, Senior Content Management Analyst, Wolters Kluwer, and Max Traphagan, Content Management Analyst, Wolters Kluwer

Businesses and individual taxpayers benefit from transparency regarding the application of taxes, yet when new revenue sources become available, clarity is sometimes lacking. This is the case regarding the taxation of digital assets.  According to the IRS, digital assets include convertible virtual currency, non-fungible tokens (NFTs), and cryptocurrency.

Currently, only 11 states provide sales and use tax guidance specifically regarding cryptocurrency (California, Kansas, Kentucky, Michigan, Minnesota, Missouri, New Jersey, New York, Tennessee, Washington, and Wisconsin). Only five states provide guidance regarding income tax and crypto (Illinois, Michigan, New York, New Jersey, and Wisconsin).

Bitcoin was first introduced in 2009, and there were other crypto iterations even before that time (e.g., eCash, E-Gold, DigiCash, etc.) Today, there are reportedly over 20,000 different cryptocurrencies. Cryptocurrency use has dramatically increased to date, and it is projected to continue to rise in the future. Yet states are often slow to respond to emerging issues.

It is in the state’s interest to enact legislation that addresses the application of tax to transactions in which cryptocurrency is used and provides administrative guidance issued by the Department of Revenue. When taxpayers are not provided with clear guidance about taxability, they may decide tax does not apply. Tax avoidance and taxpayer noncompliance are issues that regularly appear on court dockets.

Instead of losing revenue by failing to act quickly to provide clarity about the application of tax to cryptocurrency, states could ostensibly increase the revenue in their coffers by addressing the issue.

Income Taxes

The main issue regarding state income taxation of virtual currency is whether and to what extent a taxpayer should include virtual currency in their taxable income.

The five states that have weighed in so far have followed IRS guidance, which mandates that they treat virtual currency as property, like stocks or precious metals, instead of as actual currency. As such, each time someone exchanges virtual currency for something else, the state taxes the amount that the value of what they receive exceeds their basis (usually what they paid for it originally) in the virtual currency.

Sales and Use Taxes

Sales and use tax is generally imposed on the sale of taxable tangible personal property and enumerated services. Cryptocurrency, on the other hand, is digital, virtual, and intangible.

Taxpayers should ask themselves whether sales and use tax applies to:

  • the purchase or sale of crypto;
  • the use of crypto to purchase tangible goods; and
  • the use of crypto to purchase intangible items such as NFTs or other digital goods or products.

Some recent examples of state action regarding sales and use tax as it applies to cryptocurrency/virtual currency, digital goods (i.e., digital assets, digital products), and NFTs include the following:

Illinois -- Regarding the application of sales and use tax to sales of various digital goods by a digital goods distributor, a provider of software-as-a-service (SaaS) acts as a serviceman. If the provider does not transfer any tangible personal property to the customer, then the transaction generally would not be subject to retailers’ occupation tax, use tax, service occupation tax, or service use tax. (General Information Letter ST 22-0027-GIL, Illinois Department of Revenue, December 2, 2022, released February 2023)

California -- A sale that is paid for with cryptocurrency is subject to California sales and use tax like a sale paid for with United States legal tender unless the sale itself is specifically exempt or excluded from tax. Cryptocurrency is not considered United States legal tender. Rather, cryptocurrency is considered property. Therefore, when the consideration for a sale is an exchange of property, that transaction meets the definition of a "sale" for sales and use tax purposes.  (Reference #F22-12-084FU, California Department of Tax and Fee Administration, January 19, 2023)

Indiana – Indiana provides guidance regarding the application of sales and use tax to the sale, lease, or use of digital goods. A transaction involving “specified digital products” may be a retail transaction. A person engages in making a retail transaction when the person:

  • electronically transfers specified digital products to an end user; and
  • grants to the end user the right of permanent use of the specified digital products that is not conditioned upon continued payment by the purchaser.

(Information Bulletin #8, Indiana Department of Revenue, January 2023)

Pennsylvania -- According to the Pennsylvania Department of Revenue, sales and use tax applies to any transfer of a digital product where the purchaser pays a consideration unless that transfer is otherwise exempt. In addition, NFTs are subject to sales and use tax. (Bulletin Vol. 52 No. 24, Pennsylvania Department of Revenue, June 2022)


State departments of revenue often provide guidelines regarding the application of taxes. When, however, there is a lack of clarity on an issue, confusion, audits, and lawsuits can follow. Clear legislation and guidance are required on the taxation of cryptocurrency until this significant burgeoning sector is addressed by all states.

The contents of this blog post reflect those of the author, and not necessarily those of the GFRC.