From the cattle drives of the 19th century, which saw cowboys herding livestock across the open plains, to the oil boom of the 20th century that transformed dusty towns into bustling cities, Texas has always been at the forefront of economic revolutions.
Now, as we stand on the precipice of the 21st century's defining financial movement, it's not black gold but digital assets drawing prospectors to the Lone Star State. Cryptocurrencies, with their decentralized nature and promise of financial autonomy, are not just a technological marvel but a reflection of Texas's enduring spirit of independence and innovation.
Yet, as with any frontier, there are rules to be written, and in this case, they pertain to the unchartered territory of taxation. As the state grapples with the nuances of digital assets, Texans must stay informed and vigilant to ensure they can navigate evolving regulations. Let’s delve into what you need to know.
Income tax
One of the defining financial features of Texas, setting it apart from many other states, is its absence of a state income tax. This has long been a point of pride for Texans, attracting both businesses and individuals to its borders in search of a more favorable tax environment. While the federal government still takes its share, residents of the Lone Star State enjoy a reprieve when it comes to state-level income deductions.
In the realm of crypto, this absence of state income tax presents intriguing possibilities. As digital assets grow in popularity and adoption, the implications of trading, holding, or mining crypto in a state without income tax become even more significant. However, it's essential to remember that while there might be no state income tax, other forms of taxation, such as sales and property taxes, still apply.
Sales tax
According to the Texas Comptroller, “All sales of taxable items in Texas are still subject to sales tax, even if the transaction is valued in bitcoins or another cryptocurrency.” Texas has a 6.25% state sales tax. On top of that, cities and counties can also impose up to 2% sales tax for a maximum combined rate of 8.25%.
To find the exact rate based on where you live, use this Sales Tax Rate Locator.
Property taxes
If you use crypto to buy a property in Texas, there is no state property tax, but expect to pay county and city property taxes. To find what your tax rate would be, you’ll need to find your local tax office in this county directory. Then you’ll need to add up the county and city tax rates to determine what you’ll pay based on where your property is located. Here’s an example looking at Dallas:
Capital Gains Tax
If you sell a capital asset (like your crypto or your property) for more than what you paid to acquire it, there is a tax on the profit from the sale, known as capital gains tax. Texas does not have a state capital gains tax, but capital gains from your crypto are subject to the regular federal tax rates.
If you have capital losses, federal rules allow you to offset your gains with those losses.
Estate Tax
Texas does not have an estate tax. When it comes to leaving behind your crypto assets in Texas, 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.
Corporate Taxes
If you have a company incorporated, registered, or doing business in Texas (whether involved in crypto or not), you need to know about the Texas franchise tax. Instead of an income tax on businesses, which many states levy, Texas has chosen to implement this franchise tax.
Here are the key aspects of the tax:
What’s taxed: The tax is based on a business's margin, and businesses can calculate their margin in a few different ways:
- Total revenue minus cost of goods sold
- Total revenue minus compensation
- Total revenue times 70%
How much: there are two primary rates for the franchise tax:
- 0.75% for most entities
- 0.375% for entities primarily engaged in wholesale or retail trade
EZ computation: For eligible entities with revenue below a certain threshold, there's a simpler "E-Z" computation method that allows them to calculate the tax at a lower rate.
Exemptions: There are certain thresholds and entities that are exempt from the franchise tax:
- Entities with total revenue below a specified threshold (which can vary by year) are exempt from the tax.
- Certain types of organizations, like sole proprietorships, passive entities, and certain types of trusts, among others, are exempt from the tax.
Credits: There are various credits that businesses can claim against the franchise tax, such as the R&D activities credit, the renewable energy credit, and others.
How to report and pay: Taxable entities are required to file an annual report with the Texas Comptroller of Public Accounts and pay any franchise tax owed.
The Texas franchise tax has seen numerous changes over the years, both in its rate and its structure. As with any tax-related matter, it's always a good idea to consult with a tax professional or accountant familiar with the specific rules and regulations of Texas to ensure you are in compliance and are taking advantage of any available deductions or credits.
A few interesting exemptions for crypto companies include a sales tax exemption for data centers, tax abatements for crypto mining companies that agree to stop pulling power from the Texas power grid during peak times (although a bill is in the works to limit this), and another bill, H.B. 591, that’s working its way through the legislative process, that would allow crypto mining companies to set up mobile data centers at an oil well to redirect gas from a flare to a generator for on-site power without paying severance tax. By using this otherwise wasted gas for crypto mining, that’s an added financial incentive for miners who otherwise would pay tax on energy from oil and gas.
No matter your tax obligations, good record-keeping is crucial
Keeping good records is the bedrock of financial clarity and compliance. It ensures accurate reporting, defends against audits, prevents penalties, and offers unparalleled peace of mind. One tool that can significantly simplify this process is Bitwave, a crypto tax platform designed to streamline back-office operations.
With Bitwave, you can integrate the blockchain into your traditional accounting system, automating mark-to-market processes, simplifying quarter-end procedures, and avoiding manual errors.
Ready to simplify your crypto tax management? Request a demo with Bitwave today.
FAQ About Crypto Taxes in Texas
Is crypto taxed as income in the state of Texas?
One of the defining financial features of Texas, setting it apart from many other states, is its absence of a state income tax. This has long been a point of pride for Texans, attracting both businesses and individuals to its borders in search of a more favorable tax environment. While the federal government still takes its share, residents of the Lone Star State enjoy a reprieve when it comes to state-level income deductions.
In the realm of crypto, this absence of state income tax presents intriguing possibilities. As digital assets grow in popularity and adoption, the implications of trading, holding, or mining crypto in a state without income tax become even more significant. However, it's essential to remember that while there might be no state income tax, other forms of taxation, such as sales and property taxes, still apply.
Are crypto capital gains taxed in the state of Texas?
If you sell a capital asset (like your crypto or your property) for more than what you paid to acquire it, there is a tax on the profit from the sale, known as capital gains tax. Texas does not have a state capital gains tax, but capital gains from your crypto are subject to the regular federal tax rates.
If you have capital losses, federal rules allow you to offset your gains with those losses.
Are there any exemptions for crypto companies in Texas?
A few interesting exemptions for crypto companies include a sales tax exemption for data centers, tax abatements for crypto mining companies that agree to stop pulling power from the Texas power grid during peak times (although a bill is in the works to limit this), and another bill, H.B. 591, that’s working its way through the legislative process, that would allow crypto mining companies to set up mobile data centers at an oil well to redirect gas from a flare to a generator for on-site power without paying severance tax. By using this otherwise wasted gas for crypto mining, that’s an added financial incentive for miners who otherwise would pay tax on energy from oil and gas.
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.
