Crypto Tax Rates by State: Federal and State-Level Analysis

Cryptocurrency has changed the financial world and brought new opportunities for investment and transactions. But with those opportunities come complex tax implications. Cryptocurrency tax is essential for investors and businesses in the US as it involves federal and state taxes.

Federal laws provide a foundation for cryptocurrency tax in the US, but state laws add another layer of complexity to the crypto tax landscape. Each state can make its tax laws, so many different approaches to cryptocurrency tax exist nationwide.

State-by-State Tax Rate Comparison

State	Income Tax Rate	Notes
Alaska	0%	No state income tax
Florida	0%	No state income tax
Nevada	0%	No state income tax
South Dakota	0%	No state income tax
Tennessee	0%	No state income tax
Texas	0%	No state income tax
Washington	0%	No state income tax; 6.5% sales tax on NFTs
Wyoming	0%	No state income tax
Colorado	4.55%	Flat tax rate
Illinois	4.95%	Flat tax rate
Indiana	3.23%	Flat tax rate
Kentucky	5%	Flat tax rate
Massachusetts	5%	Flat tax rate
Michigan	4.25%	Flat tax rate
New Hampshire	5%	Flat tax rate, only on dividend and interest income
North Carolina	4.99%	Flat tax rate
Pennsylvania	3.07%	Flat tax rate
Utah	4.95%	Flat tax rate
California	1% – 13.3%	Progressive: highest rate for income over $1 million
New York	4% – 10.9%	Progressive: highest rate for income over $25 million
New Jersey	1.4% – 10.75%	Progressive: highest rate for income over $1 million
Connecticut	3% – 6.99%	Progressive: highest rate for income over $500,000

States with Crypto Tax Guidance

California

California was one of the first states to address cryptocurrency tax and issued guidance through its Franchise Tax Board in 2014. California treats cryptocurrencies as cash equivalents and follows federal guidelines by treating crypto as property for tax purposes. This means capital gains rules apply to crypto transactions, and residents must report even crypto-to-crypto trades. California was one of the first and most comprehensive on crypto tax, so it’s a tech hub.

Kansas

Kansas took a clear stance on cryptocurrency tax in 2014 with Notice 14-04. The Sunflower State treats cryptocurrencies as cash equivalents, focusing on sales tax. Kansas requires sellers to convert crypto payments to USD and charge sales tax. This makes it easier for the state but puts more burden on businesses to manage crypto payments. Kansas follows federal guidance for income tax purposes, so the overall tax treatment of crypto is consistent.

Kentucky

Kentucky’s Department of Revenue also issued guidance in 2014 and took a similar stance to Kansas. The Bluegrass State treats crypto as a cash equivalent and requires sellers to convert crypto payments to USD before calculating and charging sales tax. Kentucky’s guidance goes beyond sales tax and states explicitly that income from mining or selling cryptocurrency is subject to state income tax. This guidance is helpful for consumers and businesses that do crypto transactions in the state.

New Jersey

New Jersey issued a Technical Advisory memo on cryptocurrency tax in 2015. The Garden State treats cryptocurrencies as cash equivalents and follows federal guidance by treating crypto as property for tax purposes. New Jersey requires full reporting of all crypto transactions for income tax purposes, emphasizing transparency and compliance. This guidance helps New Jersey residents make sense of the crypto tax.

New York

New York is a leader in cryptocurrency regulation and tax. The state introduced the BitLicense framework in 2015, and more guidance from the Department of Taxation and Finance in 2017. New York treats cryptocurrencies as cash equivalents and follows federal guidance by treating crypto as property. The state requires full reporting of crypto transactions and has one of the most comprehensive regulatory frameworks for crypto businesses in the US. New York’s approach is because it’s a global financial hub and wants to balance innovation with consumer protection and tax compliance.

Michigan

Michigan took a different approach when the Department of Treasury issued guidance in 2015. Michigan doesn’t impose sales and use tax on crypto purchases because it considers cryptocurrency “intangible property.” This is more crypto-friendly and makes Michigan a good location for certain crypto transactions. However, Michigan follows federal guidance for income tax purposes, so crypto gains and losses are still reportable for state tax purposes.

Pennsylvania

Pennsylvania has been quiet on crypto tax guidance until 2022. The state has focused on NFTs and says they may be subject to sales tax unless exempt. For broader cryptocurrency matters, Pennsylvania follows federal guidance for income tax treatment. This is because crypto assets are still evolving, and states are still figuring out how to regulate them.

Washington

Washington State has taken a layered approach to cryptocurrency tax. It doesn’t tax crypto purchases but does tax goods and services bought with crypto. The state issued guidance in 2014 and updated it in 2022 with more guidance on NFTs. Washington requires businesses to calculate sales tax based on the fair market value of crypto at the time of the transaction, which adds another layer of complexity to crypto sales. The state’s NFT guidance is especially noteworthy as Washington is one of the first states to address this new area of digital assets.

Wisconsin

Wisconsin’s approach to cryptocurrency tax, outlined by the Department of Revenue in 2014, is one of a kind. It considers crypto an intangible right, so the sale price of cryptocurrency itself is not taxable. However, Wisconsin follows federal guidance for income tax purposes, so crypto gains and losses must be reported. This dual approach – treating crypto as an intangible right for sales tax but following federal property treatment for income tax – creates an interesting environment for crypto users and businesses in Wisconsin.

Flat State Income Tax on Cryptocurrency

The federal tax on cryptocurrency is complex with its progressive brackets, but some states make it simpler with a flat income tax rate. This flat rate applies to all taxable income, including gains from cryptocurrency investments. Let’s look at the 10 states with this system and what it means for crypto investors.

Colorado: 4.55%
Illinois: 4.95%
Indiana: 3.23%
Kentucky: 5%
Massachusetts: 5%
Michigan: 4.25%
New Hampshire: 5%
North Carolina: 4.99%
Pennsylvania: 3.07%
Utah: 4.95%

The flat tax rate system has several implications for cryptocurrency investors:

Simplicity: Flat tax rates make calculating your state tax liability on crypto gains easier. No matter how much you earn from crypto investments, the rate is the same.
Predictability: With a flat tax, you can more easily predict your tax burden as your crypto gains increase, which can be helpful for tax planning.
Benefits for High Earners: Flat-tax states might have a lower overall tax rate for those with significant crypto gains than states with progressive tax systems with high rates for top earners.
Drawbacks for Lower Earners: Conversely, those with smaller crypto gains might pay a higher rate in a flat tax state than in a progressive system with lower rates for lower income brackets.

Must Note

While these states have flat tax rates, it’s essential to understand the details of each state’s tax law:

New Hampshire: This state is the only flat tax state. Regular earned income is not subject to state tax. The 5% rate only applies to dividends and interest income. For crypto investors, only certain types of crypto income (like staking rewards) might be taxable, while capital gains from selling crypto might not be.
Definition of Taxable Income: Each state may have different rules for taxable income. Some states follow federal guidance for crypto gains, while others might have their own rules.
Deductions and Credits: Some deductions and credits can affect your effective tax rate even in flat tax states. Check if your state has any deductions or credits for investment activities.
Local Taxes: Some cities or counties within these states may have additional income taxes, which could impact your overall tax burden on crypto gains.

Compared to Progressive Tax States

When looking at the impact of these flat tax rates on crypto investments compared to states with progressive tax systems:

In high-tax states like California or New York, high earners could pay over 13% in state taxes on their crypto gains.
But in these progressive tax states, those with lower incomes and smaller crypto gains might pay a lower rate than they would in a flat tax state.

States with No Income Tax: Cryptocurrency

While federal taxes on crypto gains are inevitable, some states offer a big advantage by not having a state income tax. This can be especially good for crypto investors as they won’t owe additional state taxes on their gains. Let’s look at the 8 states with no individual state income tax and what that means for crypto enthusiasts.

No Income Tax States

Alaska
Florida
Nevada
South Dakota
Tennessee
Texas
Washington
Wyoming

Benefits of No Crypto Tax

Lower Overall Tax Burden: The most significant benefit is that crypto gains are only subject to federal taxes, saving investors thousands of dollars, especially on significant gains.
Simplicity: No state income tax means one less tax return to file and one less set of rules to deal with, making crypto taxation less complicated.
Crypto Businesses: These states may be more attractive for crypto-related businesses, leading to a more developed local crypto ecosystem.
Retirement: For those using crypto as part of their retirement plan, living in a no-income-tax state can help you keep more of your gains.

Notes

While no state income tax is good, there are other considerations:

Higher Taxes Elsewhere: These states often make up for the lack of income tax with higher taxes elsewhere. For example:
- Higher sales taxes
- Higher property taxes
- Various fees and other taxes
Crypto-Specific Regulations: Some states have implemented specific regulations or taxes on cryptocurrency. For instance:
- Washington: Despite having no income tax, Washington was the first U.S. state to include NFTs in its sales tax regime. Sellers and retailers must charge a 6.5% state tax for NFTs.
Local Taxes: Some cities or counties within these states may have local income taxes, which could apply to crypto gains.
Future Changes: Tax laws can change. While these states have no income tax now, future changes are always possible.

State Notes

Alaska: Pays residents an annual dividend from its oil wealth fund, which can be invested in crypto.
Florida: A crypto hotbed with Miami positioning itself as a crypto hub.
Nevada: Home to many blockchain and crypto startups in the Reno-Tahoe area.
Texas: Attracting crypto mining operations due to cheap electricity and favorable regulations.
Wyoming has passed several crypto-friendly laws, making it a crypto haven for businesses and DAOs (Decentralized Autonomous Organizations).

Compared to high-tax states

To put this into perspective, consider a hypothetical crypto gain of $100,000:

In a no-tax state, You’d only owe federal taxes.
In California (up to 13.3% state tax), You could owe up to $13,300 in state taxes.

Conclusion

US crypto taxation is complex at the federal and state level. Stay current with regulatory changes and consult a professional for your specific situation. Tools like the Crypto Tax Calculator and NFT Tax Calculator can help but shouldn’t replace expert advice in this space. Given cryptocurrency taxation’s complexity and ever-changing nature, it’s always best to consult a tax professional knowledgeable in state tax laws and cryptocurrency regulations to make the most informed decisions about your crypto investments and tax strategy.