HB 453 introduced in the Montana Legislature on February 11, 2025 calls for the Department of Revenue to create a program to allow state income taxes to be paid with cryptocurrency through arrangements with one ore more third party payment processors. That isn't unusual as at least one other state already does this - Colorado.
What is unusual is that HB 453 would also make the payment of Montana income taxes with crypto tax free! That is, if a taxpayer used bitcoin with a basis of $10 to pay state income taxes of $2,500, the realized gain of $2,490 ($2,500 liability satisfied with an asset with a basis of $10), would be tax free.
There is no tax policy justifying this treatment. The appreciation in the crypto used to pay state income taxes is a realized gain. It is the same result if the holder sold the $10 basis bitcoin for $2,500 and used that money to pay their income taxes - a taxable gain. If someone had to sell stock to pay their taxes, any gain would be taxable.
Of course, if a state wants to exclude such a gain, it can certainly change its income tax to do so. The gain would still be taxable for federal purposes and likely a reason why few would take advantage of this state offer should HB 453 be enacted.
If enacted, I wonder if people would reduce their withholding, such as from paychecks and increase their estimated tax payments made with crypto to maximize their exclusion (but still taxable for federal purposes). Would others in Montana ask if they can pay their taxes with appreciated assets such as stock or gold, and also get an income exclusion? After all, what is so special about crypto, particularly if a third party is going to do the conversion of that asset to cash and get the cash to the Department of Revenue?
The revenue estimate for HB 453 is about $70,000 per year which minor. I suppose people with little gain in their crypto might take advantage as the federal tax consequences would be small. But individuals with large gains would most likely not be interested as they can also avoid the federal income tax gain if they die holding the appreciated crypto (which is a much greater tax policy flaw in our tax system - excluding gains at date of death).
What do you think about providing a special state rule for paying your taxes in crypto and avoiding state tax on that gain?
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