ABA Techshow

What are state tax rules for cryptocurrency exchanges, and what do they mean for lawyers?

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Although it’s hard to know where a client paying through blockchain technology is based, lawyers have to find out for tax purposes, says Jamie Szal, a Maine tax attorney.

A partner with Brann & Isaacson, she and Jessica Neer McDonald, a Florida sole practitioner at the firm Neer McD, discussed the currency at the ABA Techshow 2023, for a Thursday panel titled “Web3 and Law Firm Financials.”

“In the blockchain world, anonymity is part of the appeal for a lot of people,” Szal said. “That makes important tax rules especially challenging.”

States require virtual currency be converted to U.S. dollars, and many jurisdictions, including Arizona, Michigan and Wisconsin, have guidance on treating cryptocurrency as a cash equivalent, according to speakers. Federal rules figure in too.

“The IRS is far out ahead of most states regarding how you record and report taxable income as it relates to digitial assets,” Szal said.

Additionally, Arizona excludes virtual currency and NFTs received in airdrops from the state income tax base, as well as the from property taxes and sales taxes, according to Szal. Kentucky, Louisiana and Missouri have similar sales laws, she said.

Follow along with the ABA Journal’s coverage of the ABA Techshow 2023 here.

Some states have considered whether businesses in the jurisdictions can take cryptocurrency; North Carolina said no, according to McDonald. In a subsequent communication with the ABA Journal, she elaborated by explaining that North Carolina allows virtual currency to be accepted in certain circumstances, but not as an advance payment to hold in trust for future services.

Blockchain, the digital database in cryptocurrency systems, was addressed, as well. It can provide the history of transactions, according to McDonald.

“For lawyers, how many times do you have to think, ‘How can I go back and find data that is more than 5 years old?’” she asked. “As we see blockchain develop, the history is encoded in the chain, and it’s there for us to access.”

However, security and privacy are other concerns.

“With a public key, how can you tie that to someone? You can look at past transactions, so be very careful. Do you want people to know how much one client paid or another?” McDonald asked.

She added that you could have multiple virtual wallets for each transaction.

Updated on March 14 to clarify North Carolina’s rules about virtual currencies.

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