Ohio is the first state in the United States to accept tax payments in cryptocurrency. Starting today, December 3, 2018, companies operating in Ohio can elect to pay certain Ohio state taxes in Bitcoin. Many Ohio state taxes are eligible for payment in cryptocurrency, including (among others) sales tax, withholding tax, pass-thru entity tax, and public utilities tax. As long as an entity operates in the state of Ohio and pays Ohio state taxes, the entity is eligible to pay such taxes in Bitcoin.
Ohio State Treasurer Josh Mandel explains that this initiative is part of a larger plan for Ohio to become “a national leader in blockchain technology.” Accepting cryptocurrency tax payments will provide companies with “more options and ease” when interacting with Ohio state government. Mandel hopes that the initiative will encourage more blockchain companies to do business in Ohio. For now, Bitcoin is the only supported cryptocurrency and individuals are not eligible to pay taxes in cryptocurrency. Ohio intends to expand the program to individuals and additional cryptocurrencies in the future.
A company that operates in Ohio can register to pay via a cryptocurrency portal. All cryptocurrency payments are processed through BitPay, a third-party payment processor, to immediately convert payments to U.S. dollars. The Ohio Treasurer’s office does not intend to hold or invest in cryptocurrency. To remedy market price volatility, BitPay will set the exchange rate for a 15-minute window for each transaction once a taxpayer begins the payment process (and will assume the risk of any market fluctuations during the time window).
When considering whether to pay Ohio state taxes in Bitcoin, companies should be aware that making a payment using cryptocurrencies is a taxable event. The United State Internal Revenue Service has ruled that “virtual currencies” (i.e., cryptocurrencies, including Bitcoin) are treated as property for federal income tax purposes. If a taxpayer uses cryptocurrency as payment, the transaction is treated as a sale or exchange for tax purposes. A company that uses Bitcoin to pay for Ohio state taxes must recognize gain to the extent that the value of the Bitcoin on the date of the tax payment exceeds the company’s initial purchase price for such Bitcoin. For example, assume that a company purchased Bitcoin for $500 that is now worth $1,000. The company will recognize a $500 gain if it uses that Bitcoin to pay $1,000 of Ohio state taxes. However, a company will not recognize any gain or loss if it pays for Ohio state taxes using Bitcoin that has a value equal to the company’s initial purchase price for such Bitcoin.
The preceding discussion is intended only as a summary of certain tax consequences of using cryptocurrency to pay Ohio state taxes and does not purport to be a complete analysis or discussion of all potential tax effects relevant thereto. This summary is not intended to constitute tax advice. Taxpayers are urged to consult their own tax advisors as to the specific tax consequences to them of using cryptocurrency to pay Ohio state taxes, the applicability and effect of non-U.S., federal, state, local, and other applicable tax laws, and the effect of any proposed changes in the tax laws.