Ah, taxes. The inevitable consequence of making, spending, or even just holding money. And when that money is in the form of cryptocurrency? Well, things get even more interesting. Especially in California, a place known for its tech-forward mindset and economic prowess.
From capital gains to income tax implications, we'll break down what every Californian needs to know about navigating the Golden State's crypto tax landscape.
Crypto is taxable if you earn it as income. California has a progressive income tax system with rates ranging from 1% to 13.3%, depending on your income level. Go to California’s online income tax calculator and enter your expected annual income (include all sources, not just crypto) to see what your tax rate would be.
Sales and Use Tax
According to the California Department of Tax and Fee Administration Reference # F22-12-084, dated January 5, 2023, sales and use tax is only applicable to transactions involving the sale or use of tangible personal property. Since crypto transactions do not involve the transfer of tangible personal property, they are not considered a "sale" under California law. Therefore, exchanges of crypto alone do not trigger a taxable event that would result in the recognition of gain or loss.
However, when crypto is exchanged for tangible personal property, it does meet the definition of a "sale" for sales and use tax purposes. This means that transactions where crypto is used to purchase tangible goods are subject to sales and use tax.
The base state sales tax rate in California is 7.25%. However, with local taxes included, the total sales tax can be as high as 10.25% in some areas.
If you have a company incorporated, registered, or doing business in California, you’re going to need to pay three types of taxes - sales, property and payroll - if you exceed these amounts (numbers are from 2022):
- CA sales exceeds $690,144
- CA real and tangible personal property exceeds $69,015
- CA payroll compensation exceeds $69,015
Now here’s the kicker: if your sales, property, and payroll in California are lower than the amounts above but more than 25% of your totals, you also have to pay taxes to California. For more details and example scenarios, read California’s Doing Business in California webpage.
Now for some good news: if your company has business expenses, it may be possible to deduct those expenses to lower the overall tax liability of your business.
There’s no difference in the rules if your company deals in crypto or not.
California imposes a corporate income tax on businesses. Again, if you receive income in the form of crypto, it needs to be reported. The rate is 8.84% for most corporations, while banks and financial corporations are taxed at 10.84%.
California imposes property tax on businesses, both for real property (like land and buildings) and personal property used in the business (like machinery or equipment, including mining rigs). The tax rate for both is capped at 1% of the assessed value.
Businesses with personal property that cost less than $100,000 are generally not required to file a property tax return.
Employers in California are responsible for paying payroll taxes, which include State Disability Insurance (SDI), Employment Training Tax (ETT), and Unemployment Insurance Tax (UI). Additionally, while not a tax on the business, they also have to withhold employees’ personal income tax from their wages.
In 2023, the maximum UI tax is $434 per employee per year, the maximum ETT is $7, and the maximum SDI tax is $1,378.48.
Capital Gains Tax
If you sell crypto for more than what you paid to acquire it, there is a tax on the profit from the sale. This is known as capital gains tax. In California, there is no separate or lower rate for capital gains tax like there is at the federal level. Instead, capital gains from your crypto are taxed as ordinary income, meaning they are subject to the regular income tax rates applicable to your income bracket.
If you have capital losses, California allows you to offset your gains with those losses.
California does not have an estate tax. When it comes to leaving behind your crypto empire in California, the taxman takes a break, allowing your heirs to inherit it all, no strings attached.
However, large estates may still be subject to federal estate tax.
Good record-keeping is crucial
The intricacies of each tax type can be overwhelming and good record-keeping can mean the difference between having a clear financial picture and being in the dark about your tax obligations.
One tool that can significantly simplify this process is Bitwave, a crypto tax platform designed for businesses to streamline back-office operations, increase productivity, and reduce complexity. It helps track every crypto transaction and taxable event, simplifying quarter-end procedures. It also integrates the blockchain into your traditional accounting system, automating mark-to-market processes, saving time, and avoiding manual errors.
It even offers a solution for enterprises to pay bills, invoice, or run payroll in crypto. With advanced APIs, custom reporting, and out-of-the-box Gain-Loss Reports, Bitwave is a comprehensive solution for managing your crypto taxes.
Ready to simplify your crypto tax management? Request a demo with Bitwave today.
Disclaimer: The information provided in this blog post is for general informational purposes only and should not be construed as tax, accounting, or financial advice. The content is not intended to address the specific needs of any individual or organization, and readers are encouraged to consult with a qualified tax, accounting, or financial professional before making any decisions based on the information provided. The author and the publisher of this blog post disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use or application of any of the contents herein.