Cryptocurrency — or “virtual currency” as it’s called by the Arizona legislature — is rapidly becoming more accepted and accessible to the general public. Arizona has recently addressed how air dropped virtual currency is to be treated for state tax purposes.
A Refresh on Cryptocurrency Basics
Cryptocurrency is a currency or monetary equivalent that exists only digitally. Some of the most common ones are Bitcoin, Ethereum, and Tether. Each are created using blockchain technology that records transactions and establishes units that can then be exchanged with others for goods, services, or other currencies.
While cryptocurrencies are decentralized and inherently not attached to a valuation established by any country’s government, it is viewed as a foreign currency in the eyes of the U.S. government.
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The number of different cryptocurrencies is difficult to assess but various websites indicate there are 10,000 to 20,000 or more that have been established. Airdrops are a way that some cryptocurrencies market themselves to potential buyers. In an airdrop, cryptocurrency is delivered to recipients’ digital wallets for free or in exchange for a small promotional service, such as sharing the airdrop event via social media.
Non-fungible tokens, or NFTs, are other digital items that are sometimes delivered by airdrop. NFTs can be anything digital such as an image, drawing, or music that primarily use the Ethereum blockchain to create unique units that can then be exchanged and gain value. Airdrops provide publicity for NFT creators and expose them to a large number of individuals and investors to generate attention and build a following.
The Impact of Arizona House Bill 2204
The Internal Revenue Service (IRS) considers cryptocurrency as property for tax purposes and it is treated similarly to other owned assets such as stock. Arizona House Bill 2204 addresses the income tax treatment of airdropped cryptocurrency and non-fungible tokens that are sent for free to digital wallets. The new bill, which becomes effective January 1, 2023, treats the airdropped items as gifts which will not be taxable upon receipt. Income taxes will still apply to potential capital gains when the assets are sold and taxpayers will be allowed to subtract transaction fees—such as gas fees paid to facilitate the exchange—to the gains or losses from cryptocurrency sales.
WE WELCOME YOUR QUESTIONS
The REDW State and Local Tax (SALT) team can keep you current on the latest tax laws that affect you. Use the form below to contact State and Local Tax Manager Jeanna Schenk, CPA, MST.
