Part one can be read here.

The record-keeping requirements of paying taxes in cryptocurrency would therefore be immense. Every time you transfer cryptocurrency, you trigger a gain or a loss on that asset. However, the consequences of failing to account for that gain or loss are more severe when the trigger is payment to a taxing body of the government. Such a “sale” puts the taxing authority on automatic notice that you as a taxpayer should be including one gain or loss for every crypto asset “sold” in payment to the state’s tax department. But the potential difficulties for taxpayers do not stop there.

If a business chooses to pay its workers in crypto, it is technically “selling” that asset for the dollar value of whatever it is paying the employee in wages or bonuses. For companies that retain 1099 contractors, there is no place on the 1099 form to write in $X in crypto; the tax form must be completed with the dollar value of the payment to the independent contractor listed. Therefore, to use crypto to pay an independent contractor there must legally and logically first be a sale of the crypto asset, triggering a tax gain or loss depending on the underlying basis of the asset.

There are potential consequences for the payment of estate taxes, as well. Ohio does not have an estate tax, but if other states that do follow suit and allow for the payment of state taxes in cryptocurrency then there are complications involved in the passing on of crypto assets to heirs. For one thing, the traditional manner of accounting for passed on assets is to give the assets a “basis step up” from their original basis to a cost basis equivalent to the market price of the inherited asset at the time it was passed on.

In the case of early investors in cryptos like bitcoin, the result could be that heirs inherit an asset that has appreciated 442% in only two years, and an astounding 4,000% in a little over five years. The heirs could then sell the appreciated capital asset with no tax burden attached to it (15% long-term capital gain rate on the $0 appreciation from the stepped-up inheritance basis). Technically this would just treat cryptos like any other asset, but rare is far too tame a word to describe how uncommon it is for dollars to be turned into an asset that then appreciates by a factor of 40 over so short a period of time, with the holder never to be taxed on any of that appreciation.

In summary, Ohio has decided to be the first to open its treasury to receiving taxes in cryptocurrency. Other states may choose to do so, but whether taxpayers themselves will follow suit will depend on the degree to which they want to deal with the secondary tax consequences of “selling” their crypto assets in payment to the taxing authorities.

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