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Monday, July 4, 2022

Arizona HB 2204 proposes unusual tax breaks for crypto

The Arizona House and Senate approved HB 2204 and sent it to the governor on June 29. This bill adds new reductions to Arizona gross income for the value of virtual currency and non-fungible tokens (NFTs) received from an airdrop. Apparently though any future appreciation would not be subtracted from gross income. While not clear, I assume these tax-free airdrops will have zero basis for Arizona and a gain when disposed of.

In addition, gas fees not already added to the taxpayer's basis in virtual currency or NFT is also a subtraction from gross income. I'm not clear what this means for basis.

HB 2204 includes definitions for gas fee, NFT and virtual currency. The virtual currency one matches the IRS definition in Rev. Rul. 2019-24 on hard forks - "s a digital representation of value that functions as a medium of exchange, a unit of account, and a store of value other than a representation of the United States dollar or a foreign currency."

These changes, if enacted, would be effective after 12/31/22.

What is the purpose? I assume it is to encourage Arizonians to own virtual currency and hope for an airdrop of virtual currency or an NFT. It seems like an unusual way to encourage ownership of virtual currency particularly given that airdrops are not that common.

While IRS Rev. Rul. 2019-24 deals specifically with hard forks, it refers to hard forks following an airdrop. I think the IRS view of the tax treatment of receiving an airdrop is that once it is available for the taxpayer to access, even if the taxpayer doesn't want to access it, it is included in income at its FMV when received.

So, HB 2204 will create federal-Arizona differences in basis and gross income for owners to track.

If the lawmakers really want to encourage ownership of virtual currency, why don't they:

1) Add a de minimis rule to exclude gains.

2) Give all Arizonians some virtual currency. Or perhaps something like Miami did with MiamiCoin (4/21/22 FastCompany article and Citicoins info).

3) Give a tax break to miners and stakers residing in Arizona.

What do you think?

Addendum (8/4/22) - Thank you to John Schoenecker and Miles Fuller at TaxBit for raising an issue on my comment in the original post (above) on HB 2204 requiring Arizonians to track different basis for federal and Arizona.  I assumed that if the virtual currency or NFT is received tax free, it has a zero basis while it will have a federal basis equal to the revenue reported when received.

But I was thinking with a California perspective. John and Miles pointed out that Arizona follows federal AGI and then only makes additions and subtractions as noted in the statute (HB 2204 adds a new subtraction for the gross income picked up for federal from the airdrop and the gas fee adjustment).  So, if no addition or subtraction is provided for the disposition of the virtual currency seems to be the same gain or loss as for federal. Hopefully the Arizona DOR will clarify HB 2204.

Thanks John and Miles!

I still puzzle as to the purpose of HB 2204 as it applies to very few people unless there is some upcoming activity to provide lots of virtual currency or NFTs to Arizonians (unlikely, but you never know). Some ideas on the purpose:

1. Get some attention in the virtual currency/NFT arena as a tax friendly state.

2. Remove any tax issue on what the value is of the virtual currency or NFT received from an airdrop and exactly when it is income. This is weak though because the recipient still needs to do this for federal purposes.

3. Encourage Congress to enact something similar. Again though, seems weak as Congress has many other items on its agenda and this would be a revenue loser.


1 comment:

21st century taxation (Annette Nellen) said...

7/6/22 = the governor signed this bill (Chapter 369)