Colorado Becomes First U.S. State to Accept Crypto Tax Payments

The Colorado governor makes good on his crypto-payment promise.

Various states have touted their crypto-friendly credentials in recent years. But Colorado has made the move to become the first state to accept crypto payments for state taxes. According to the Denver Gazette, Colorado Governor Jared Polis confirmed this week that the state would accept cryptocurrency payments for all state tax bills.

Colorado's crypto tax payments

Polis first proposed the crypto tax payment idea earlier this year, but it's taken a while to make it a reality. Colorado residents can now choose cryptocurrency as a payment option on the revenue payment web page. Cryptocurrency payments need to be made through PayPal and come with a $1 fee plus 1.83% of the payment amount.

Colorado's pro crypto legislation earned it a spot on The Ascent's list of top five crypto states. Back in 2019, the state passed the Colorado Digital Token Act, which exempts certain cryptos from securities regulations. Progress with crypto tax payments is another big step. Assuming the state follows its previously announced plans, it won't hold any crypto -- the tax payments will be immediately converted into dollars.

Other cities and states have introduced crypto-friendly legislation and made high-profile bids for the crypto crown. For example, the mayors of both Miami and New York opted to take their first paychecks in Bitcoin (BTC), while other places have tried to attract crypto businesses by making it easier for them to operate in those locations.

Should you pay taxes -- or anything -- with crypto?

In spite of the drop in crypto prices, adoption continues. You can use a crypto debit card that's connected to your crypto exchange to make many types of payments. Plus, there are a number of places you can pay with crypto. However, there are a few things to take into account.

• Fees: There are a few different fees associated with crypto payments. You may pay a fee to buy crypto as well as a fee when you deposit fiat (traditional) currency onto a crypto platform. On top of this, as the Colorado example shows, you could encounter fees when you make the payment itself. While crypto may not be the most expensive payment option for Colorado residents, there are also several free ways they can pay their taxes.
• Taxes: When you pay with crypto, there are tax implications. It essentially counts as selling your crypto, and you may need to pay capital gains tax. Learn more about crypto taxes here.
• It doesn't fit with a buy-and-hold investment strategy: If you bought Bitcoin because you plan to hold it for the long term, using it to buy a coffee or pay your taxes is counterintuitive. It would be similar to using a stock investment to pay your everyday bills.

It is very early days for cryptocurrency payments. Right now, many crypto fans may find the pros -- such as being able to pay even if you don't have a bank account -- are outweighed by the cons. This is particularly the case if you're a long-term investor who plans to hold your investments for the coming five, 10, or 20 years.