Colorado accepts tax payments in crypto: Was it just a matter of time?

The governor of Colorado, Jared Polis, announced in February that the state government plans to allow residents to pay taxes in cryptocurrencies as early as the summer of 2022. To some experts, the move is both legitimizing for the crypto asset class and was expected to come in due time. 

In an interview, Polis said crypto holders in Colorado could have the option of sending tax payments in digital currency, with the state converting the funds back into fiat as soon as the payments were received through an unnamed intermediary.

Colorado is already a leader in Crypto with our first in the nation Chief Blockchain Architect, hosting ETHDenver and other blockchain hackathons. It was great to sit down with CNBC to discuss the initiatives Colorado is taking on cryptocurrencies. pic.twitter.com/p5WtlF2E0r

— Governor Jared Polis (@GovofCO) February 17, 2022

Polis added that after the rollout this summer, the state could accept cryptocurrency payments for things “as simple as driver’s license or hunting license” within a few months. The governor said at the time he was “not at all” concerned about the potential volatility of cryptocurrencies like Bitcoin (BTC), given the state does not plan on holding the coins for long.

Shortly after taking office in 2019, Polis signed the Colorado Digital Token Act into law, aiming to exempt tokens with a “primarily consumptive purpose” from some securities regulations. The governor also said that State Senator Chris Hansen was working on a bill that would “allow state-created digital tokens to be utilized for state reserve purposes.”

Speaking to Cointelegraph, Senator Hansen said the bill “introduces extra security, saves on costs, diversifies the pool of investors, and the potential to lower interest rates paid by the state.” Hansen said:

“We need to ensure that every Coloradan can equitably participate in and benefit from investment in our state. By expanding beyond institutional investors and commercial banks, we invite millions of Coloradans to share in the financing of new capital assets.”

The senator stated that he is looking forward to seeing how the state will help “communities rebound from the pandemic, improve their quality of life, and address inequities that have kept everyday folks from fully prospering from our economy.”

Money as a representation of debt

Money was initially concocted as a physical representation of debt, according to anthropologists such as the late David Graeber. Governments, Graeber pointed out, utilized money to standardize the payment of tributary obligations and facilitate the maintenance of their workers.

Speaking to Cointelegraph, Brian Pasfield, chief technology officer at Fringe Finance — a decentralized lending platform — cited Graeber’s work to suggest cryptocurrency is being legitimized by moves like Colorado’s. Pasfield said:

“Seeing governments recognizing cryptocurrencies as a viable medium of payment for taxes speaks lengths about a mindset change in the way we view these currencies.”

Pasfield added that accepting crypto for tax payments will “inevitably lead to governments having to manage and hold these currencies within their Treasuries,” which can help reduce the volatility crypto assets are known for.

He added that if a large federal government like that in the United States were to finalize the regulation of cryptocurrencies, it would be a logical step for it to “accept [cryptocurrencies] as a legitimate form of one of the oldest social technologies: money.”

Russel Starr, CEO at DeFi Technologies — a technology company with products for investing in decentralized finance — told Cointelegraph he believes a government’s treasury should be denominated in the currency it uses to pay for services, meaning that if it’s going to pay employees in dollars, its crypto income should be converted to dollars.

However, Starr said that any entity should “have diversified investment holdings,” which should “absolutely include cryptocurrency and other decentralized financial products.”

Per the CEO, the “growth potential of cryptocurrency would make it an attractive asset in any carefully balanced portfolio, especially in that of the Mile High State.” This growth potential could also mean that governments accepting cryptocurrency for tax payments was a long time coming.

Governmental adoption “only a matter of time”

In February, California State Senator Sydney Kamlager introduced a bill that would amend the state’s code in order to accept cryptocurrencies for certain civic payments.

The bill proposed authorizing a state agency to “accept cryptocurrency as a method of payment for the provision of government services.” Back in 2018, Ohio became the first U.S. state to accept Bitcoin for taxes but dropped the crypto tax payment program in 2019, citing legal issues.

Jaideep Singh, co-founder and CEO of artificial intelligence tax engine firm FlyFin, told Cointelegraph cryptocurrencies are slowly getting regulated. Per Singh, crypto regulations started with reporting on crypto transactions for U.S. tax filers before government agencies shifted to tracking cryptocurrency transactions.

Tracking cryptocurrency transactions reduces their anonymity and “furthered a trend that we will see over the next several years” involving more transparency, tracking technology and increased regulatory requirements for crypto:

“It is the responsibility of governments to make sure that its citizens are not defrauded, criminal activity is curtailed, and that taxes are not being circumvented. So, this new development happening in Colorado was only a matter of time.”

Singh sees the U.S. leading the world when it comes to cryptocurrency acceptance, with other countries following, as “we will almost certainly see the adoption of blockchain and other cryptos by central banks.”

Ben Weiss, chief operating officer at Bitcoin ATM operator CoinFlip, told Cointelegraph he believes Colorado’s move will “likely create a chain reaction, with other states in the country following suit — especially if the rollout goes as planned.” To Weiss, this could be a “major step towards consumers recognizing crypto as a legitimate form of currency.”

Weiss added that the move could further boost cryptocurrency use cases among government services:

“This advancement may also encourage crypto transactions to be implemented in other places statewide, such as at a local DMV [department of motor vehicles]. This is a great opportunity for Colorado to build its reputation as a tech hub and mark its place on the forefront of a digital revolution.”

Weiss said that U.S. states could consider holding crypto assets because of their potential to appreciate, as the extra money gained through it can “be utilized to improve roads, clean parks, and help finance other underfunded areas of the local government.”

Speaking to Cointelegraph, Patrick White, co-founder and CEO of crypto asset tax and accounting software provider Bitwave, said he loves seeing states such as Colorado and California moving to accept crypto for taxes but “not for the reason one might think.”

White added that working with crypto assets requires “muscle memory; it requires understanding how to on-ramp and off-ramp, learning to do the tax and accounting, figuring out custodianship, and more.” He added:

“It’s a huge step for the industry that multiple states are having to really understand crypto, makes rules around pricing digital assets for real tax purposes, and more.”

Weiss hopes the U.S. federal government is next in line and that government bodies end up keeping “some of the assets on the balance sheet instead of just selling it right off.”

Even if governments do not keep crypto assets on their balance sheets, demand for cryptocurrencies that they accept as payment could surge. One way demand for fiat currencies is maintained is through their use in tax payments: People need to hold fiat so they can meet their tax obligations at the end of the month or year.

If cryptocurrencies are to be used to pay for taxes, the need to hold fiat currencies is greatly affected, even more so because paying for goods and services with crypto is becoming increasingly easier with the use of crypto debit cards.