Cryptoasset Transactions: State Corporate Income Tax Implications

May 2022

BY

John YoakSenior Manager, State and Local Tax

The following article, Cryptoasset Transactions: State Corporate Income Tax Implications, originally appeared in the May 2022 issue of The Tax Adviser.

Many businesses that once considered cryptoassets a highly speculative investment have been won over by the secure, real-time, peer-to-peer nature of cryptoasset transactions and now use cryptoassets as a part of their overall strategy to fund operations and to engage in day-to-day business transactions with customers.

Such businesses will need to keep a watchful eye on the state tax, as well as federal tax, implications of such transactions. For example, businesses will need to consider timing and valuation issues related to income and/or gain recognition, sourcing issues related to mined cryptoassets, recordkeeping issues related to acceptance/utilization of cryptoassets in the regular course of business, issues related to the periodic conversion of cryptoassets to fiat currency for the purpose of making domestic and foreign tax payments (e.g., sales and use tax, value added tax), and income classification and revenue-sourcing issues related to buying and selling cryptoassets through virtual currency exchanges.

This discussion examines how state corporate income taxation applies to virtual currency exchange transactions. The specific focus is income classification and revenue-sourcing issues, with California law used to illustrate how states may address such issues.