As cryptocurrency becomes increasingly popular, California stands out as a leader in the tech industry. The state is home to numerous innovative blockchain and cryptocurrency ventures. As digital currencies like Bitcoin, Ethereum, and others gain traction, California residents and businesses must comprehend cryptocurrency taxation's intricacies.
Given its dynamic and evolving nature, understanding how to handle your tax obligations associated with cryptocurrency can be daunting. This guide will provide clear and valuable insights into the cryptocurrency tax landscape in California to help individuals and businesses stay compliant and avoid costly mistakes.
How Cryptocurrency is Taxed in California
California follows federal guidelines by treating cryptocurrency as property for tax purposes. Any transaction involving cryptocurrencies—buying, trading, or earning income through mining—falls under specific tax rules.
From capital gains taxes to income tax obligations, California's approach to cryptocurrency taxation covers many scenarios, which can be confusing without proper understanding. Let's explore the different cryptocurrency-related taxes in California and how they affect you when safeguarding digital assets.
Taxation of Cryptocurrency Income
In California, if you earn cryptocurrency through any means, it is treated as income, and you must report it to the state. The income is taxable whether you're receiving cryptocurrency as payment for goods or services or through mining or staking.
California employs a progressive income tax system where the tax rate is based on your overall income. Rates can range from 1% to 13.3% which is based on your income bracket. If you are self-employed or own a business and accept cryptocurrency payments, you must report this income just like any other payment you get. Additionally, cryptocurrency mining and staking rewards are income and must be reported and taxed accordingly.
For businesses, if you receive cryptocurrency as a form of payment, it must be reported and treated as property in your tax filings. This treatment means firms are also subject to income tax on loans against your Bitcoin, similar to income from traditional sources.
Capital Gains Tax and Cryptocurrency
Capital gains tax is another key tax consideration for cryptocurrency holders in California. Since the state treats cryptocurrencies as property, any gains from selling or exchanging cryptocurrencies are subject to capital gains tax. The difference is considered a taxable gain when you sell your cryptocurrency for more than what you initially paid for it.
California has no separate rate for capital gains tax—profits from cryptocurrency sales are taxed at the same rates as ordinary income. The tax rate can range from 1% to 13.3% based on your total income. If you sell cryptocurrency at a loss, you can use this loss to compensate for any capital gains in the same tax year, reducing your overall tax liability.
Unlike federal tax laws, which may offer a lower rate for long-term capital gains, California taxes all gains from cryptocurrency transactions as ordinary income. Therefore, understanding your tax bracket is important to determine how much you'll owe after a sale.
Sales and Use Tax on Cryptocurrency
California's sales and use tax laws do not apply to cryptocurrency transactions unless the cryptocurrency is used to purchase tangible personal property. In accordance with the California Department of Tax and Fee Administration (CDTFA), cryptocurrency transactions solely involving digital assets are not taxable sales. However, if cryptocurrency is exchanged for tangible goods or services, it falls under the definition of a taxable sale.
The base sales tax rate in California is 7.25%, but due to additional local taxes, it can go as high as 10.25% in some localities. Therefore, businesses accepting cryptocurrency as payment for physical goods must apply sales tax accordingly when the cryptocurrency is used to purchase tangible items.
Both businesses and individuals must be aware of these tax rules to ensure they follow California's tax laws when using cryptocurrency for purchases.
Corporate and Payroll Taxes
For businesses operating in California, dealing with cryptocurrency brings additional tax considerations. If your business engages in cryptocurrency transactions, you must comply with corporate income tax laws. The tax rate for most businesses is 8.84%, while for financial institutions like banks, it's 10.84%.
California also imposes taxes on businesses that exceed certain thresholds, including sales, property, and payroll taxes. If your business has sales in California exceeding $690,144, or owns real or personal property valued over $69,015, or pays payroll compensation over $69,015, you will be subject to California's corporate income tax. Even if your business does not meet these thresholds but has a significant portion of its business in California, it could still be liable for tax payments.
In addition to corporate taxes, California businesses must also pay payroll taxes. These include State Disability Insurance (SDI), Unemployment Insurance (UI), and Employment Training Tax (ETT). For businesses dealing with cryptocurrency, these taxes apply just as they would for any other income or wages paid.
Reporting Cryptocurrency Transactions
Proper reporting is crucial for staying compliant with California's cryptocurrency tax laws. The California Franchise Tax Board (FTB) requires taxpayers to report cryptocurrency transactions on their annual tax returns, including sales, trades, and income earned from digital assets.
For individuals holding cryptocurrency in foreign accounts, reporting under the Foreign Account Tax Compliance Act (FATCA) and the Foreign Bank and Financial Accounts Report (FBAR) regulations is also required. Failing to report cryptocurrency holdings properly can result in severe penalties, so it's essential to ensure everything is disclosed accurately.
The Digital Financial Assets Law (DFAL)
A major change in California's approach to cryptocurrency regulation is the introduction of the Digital Financial Assets Law (DFAL), which will take effect in July 2025. The DFAL establishes a comprehensive regulatory framework for cryptocurrency businesses operating in California. Under this law, any entity dealing with digital assets, including the US national stockpile, must obtain a license from the state. This safeguards that businesses are transparent and accountable, providing consumers with greater protection.
The DFAL also includes specific provisions for stablecoins, requiring that issuers be licensed banks or trust companies. This move aims to increase the security and reliability of stablecoins used in the state.
The law also mandates consumer protection measures and implements anti-money laundering (AML) requirements for cryptocurrency entities. These provisions reflect California's effort to promote innovation while guaranteeing a stable and safe financial environment for digital assets.
Estate Tax and Cryptocurrency
A favorable aspect for cryptocurrency holders in California and crypto markets in 2025, is the absence of an estate tax. This means that your heirs will inherit your cryptocurrency holdings without the state imposing taxes on your estate. However, federal estate taxes may still apply to large estates, so it's important to plan accordingly with an estate attorney to ensure your digital assets are passed on according to your wishes.
Importance of Keeping Accurate Records
Given the complexities involved in cryptocurrency transactions, maintaining accurate records is essential for both individuals and businesses in California. With multiple taxable events happening with each trade or sale, keeping track of every transaction is vital to ensure proper reporting.
Tools like Bitwave can help simplify this process by offering a platform designed specifically for cryptocurrency tax management. Bitwave integrates with your traditional accounting system to automatically track transactions, calculate gains and losses, and generate reports that can be used for tax filings. This helps prevent costly mistakes and ensures that you stay compliant with all applicable tax laws.
It is essential to seek a trusted cryptocurrency lawyer in California who specializes in cryptocurrency taxation and compliances. Whether you're a cryptocurrency trader, a business accepting digital payments, or a miner, our team offers customized legal advice and support to help you navigate California's complex and ever-changing regulations.
Don't risk costly mistakes when managing your cryptocurrency taxes. Reach out to Bulldog Law for expert guidance and ensure your digital assets remain fully compliant with state tax laws.