Colorado accepts cryptocurrencies as payment for any state taxes due September 1st. This was the result of a pledge made earlier this year by Colorado Gov. Jared Polis, who showed his commitment to establishing a state as a supporter of cryptocurrencies.

Colorado is not the only US state trying to encourage cryptocurrency investment within its borders, as lawmakers in Arizona, Wyoming, and Utah have previously introduced bills to accept tax payments in varying degrees of digital currencies.

Countries using blockchain technology and the crypto sector can achieve a lot economically. Experienced governments have begun pitching their buildings as the next hub of the crypto economy, hoping to attract new companies and smart, young, and wealthy crypto components.

However, taxpayers should be warned about the tax consequences of making payments using cryptocurrencies, as making such payments is a taxable event and may result in an increase in the amount of tax payable.

Let’s hope other states follow Colorado’s lead, but they also need to understand where the Colorado initiative is failing. Going forward, if countries are to succeed in accepting cryptocurrencies as a means of payment, they need to understand the tax dilemma associated with making payments in cryptocurrencies and move towards a solution that accepts stablecoins as a means of payment.

Cryptocurrency payment problem
The big blow for states that accept taxes paid in crypto is that using crypto to pay state taxes is a taxable act for individuals — the payment triggers its own income event.

The IRS treats crypto as property, which means that if the price of the crypto you use to pay government taxes increases over time, you earn taxable income equal to the amount of the price that has been assessed since you bought it.

It is important for people to know that paying taxes in crypto will result in another taxable event in the next tax year.

For example, let’s say that after you calculate your taxes for 2022, you have a $10,000 tax bill for your state of residence. You pay this $10,000 in bitcoins (


) before the expiration date, April 15, 2023. If you bought that bitcoin for $2,000, you have now made a profit of $8,000 by getting rid of that bitcoin. You now have to pay taxes on your $8,000 profit for the 2023 tax year – just for paying taxes with the settlement cryptocurrency.

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Most people who have invested enough to use cryptocurrencies as their primary payment method have probably increased their wealth in cryptocurrencies. These people may not want to use their valuable cryptocurrency to pay government taxes to avoid additional taxes.

If those with the ability to pay taxes in crypto are unlikely to do so, countries may find that their initiatives have not received the momentum they expected. Thus, these programs may become more expensive than they are worth.

How countries can allow paying taxes in cryptocurrency
Currently, the only way to pay Colorado taxes in crypto is through the PayPal Crypto Hub, which does not include stablecoins as a payment method. If countries decide to accept stablecoins as a means of payment, there is a chance that payments using cryptocurrencies will be successful throughout the country.

Crypto tokens pegged to the price of the US dollar remove the conversation tax when using cryptocurrency to make payments. While getting rid of these stablecoins still needs to be reported on a tax return, the value of stablecoins does not fluctuate significantly.

Any profit or loss will most likely be zero or at most a few dollars and will not materially affect the amount of tax you pay.

Of course, converting any bitcoin or any other cryptocurrency to a stablecoin is itself a taxable transaction. However, it is highly likely that as the cryptocurrency ecosystem develops, cryptocurrency holders will have a larger percentage of stablecoins in their total portfolio.

These original cryptocurrencies see cryptocurrencies and decentralized finance as an alternative to the banking system. It is quite realistic that in this alternative system, people will have a certain amount of liquid assets with which they can pay, including government tax payments.

Source: CoinTelegraph