Just Six of 1.37 Million Colorado Tax Payments Have Used Crypto

In February, Governor Jared Polis took to the stage at ETHDenver, the longest-standing cryptocurrency conference in the world, with a big announcement: Colorado would soon become the first state to accept cryptocurrencies for payment of state taxes and fees.

"We won’t be holding any assets in that form, but we will have a layer that allows for payment in those forms and then conversion into the units that we use, which is dollars," Polis said at the time. And while it might have just a marginal impact on Coloradans doing their taxes in the beginning, he contended, the move is "important symbolically to show that we are a crypto-forward state."

On September 1 of this year, the Colorado Department of Revenue began accepting cryptocurrency payments for taxes and fees.

"This includes individual income tax, business income tax, sales and use tax, withholding tax, severance tax and excise fuel tax," says Daniel Carr, a spokesperson for the Department of Revenue.

The move came as part of the pitch by the State of Colorado, which hired a chief blockchain architect in 2019, to position itself as a hub for crypto and blockchain technology.

But from then until December 12, although Coloradans have made 1.37 million payments of state taxes in that time, just six of those payments have been made using cryptocurrency.

Part of the reason that the crypto tax payment program has been so unsuccessful so far may have to do with a fee levied upon those paying for taxes with crypto.

"There is an additional $1 plus 1.83 percent of the payment amount service fee when paying your taxes via cryptocurrency," says Carr, adding that "those who choose to pay with cryptocurrency through Revenue Online will be directed to PayPal, where they will be able to select their desired cryptocurrency to use for the payment. A sufficient amount of cryptocurrency to cover the tax and obligation and fees is converted to dollars and remitted to the Department of Revenue to complete the online transaction. Effective on the date initiated, USDs will transfer in three to five business days."

But there's an added element that may be discouraging people even more from paying for Colorado taxes using cryptocurrency: the fact that people using crypto to take care of their taxes will likely have to pay added taxes on this type of transaction in the form of a capital gains tax.

"For people that would consider this, it could be somewhat of a barrier to using it," says Kent Barton, a Colorado-based crypto professional who works as the tokenomics workstream leader at ShapeShift. Barton also co-founded ETHDenver.

"This is one of the challenges right now. I think it’s something that the federal government will have to figure out," Barton adds.

One way around that would be for the PayPal cryptocurrency service that the state uses to start accepting more forms of cryptocurrency. Right now, PayPal can take Bitcoin, Bitcoin Cash, Ethereum and Litecoin.

Barton believes that the State of Colorado could get more takers if the PayPal service also took stablecoins, which "allow you to just have dollars that can be sent around and be treated like cryptocurrency."

"That is not a taxable transaction, because they’re just treated like dollars. I bet that would lead to an uptick in how many people are using this," Barton adds.

He speculates that another reason that people may not pay their taxes using cryptocurrency is that the crypto market, like the stock market, has been going through a lengthy bear market, and people might be reluctant to essentially sell low on the crypto assets they have.

"I would bet that a lot of crypto users or investors that are holding crypto are probably reluctant to part with it now because prices are down," Barton says.

The last year has been a devastating one for cryptocurrencies. When Governor Polis announced the crypto tax payment initiative on February 18 at ETHDenver, the price of Bitcoin, the most well-known cryptocurrency, was $39,983.50. On December 15, that price was down to $17,423.

Ether, the native coin of the open-source blockchain Ethereum, which gives its name to ETHDenver, was listed at $2,780.08 on February 18. The December 15 price was down to $1,273.58.

These massive drops in the prices of cryptocurrencies contributed to the November collapse of cryptocurrency exchange and crypto hedge fund FTX, which encountered a liquidity crunch that led to the company filing bankruptcy. Its founder, Sam Bankman-Fried, faces fraud and conspiracy charges filed by federal prosecutors, in addition to investigations by U.S. regulators.

But state officials don't view the low number of crypto payments for Colorado taxes as a sign of failure.

"Colorado is a forward-looking state, and to improve customer service and convenience, we want to accept payments in as many ways as possible. This new payment option is a continuation of providing customer convenience through pioneering digital services. Our goal is always to give Coloradans that convenience of options," says Carr, who notes that there is no financial risk to the state, since it's handling all the transactions through PayPal, and adds that Colorado has received no complaints about the process to date.

For Barton, the fact that the State of Colorado is actually accepting tax payments in crypto is important for showing government recognition of the power of crypto and blockchain technology.

"I would say, more than anything, the real value of this, the real meaning of this, is the state and the governor signaling that, hey, as opposed to treating crypto or the industry as a pariah or treating crypto assets like poison, [they're] legitimizing it," Barton says.