Written by: TaxDAO
1. Overview of Texas
The State of Texas, abbreviated as Texas, is the second-largest state in the U.S. by land area and population (covering about 690,000 square kilometers, second only to Alaska; with a population of about 30 million, second only to California), located in the south-central region of the U.S. It is referred to as the 'Lone Star State' because it was once an independent republic.
Image self-made, data source: Wikipedia U.S. GDP and Population
In 2022, Texas had an economic output of $2.4 trillion, accounting for 9.4% of the U.S. GDP. Its major industries include energy, agriculture, high-tech manufacturing, and financial services. The state is rich in natural resources, with oil and natural gas being its primary minerals, known oil reserves exceeding 8 billion barrels, accounting for about one-third of the known supply in the U.S. Many large international oil companies are headquartered in Texas, including ExxonMobil and BP. Texas is also one of the major hubs in the U.S. for developing computer components, systems, and software. Austin, Dallas, and Houston are the main centers of this industry in Texas, with the Austin area often referred to as 'Silicon Hills.' Texas has an average electricity price of about $0.105 per kilowatt-hour, accounting for 25.5% of the national capacity, making it a free land for electricity.
Image self-made, data source: EIA, electricity price and share
2. Basic Tax System of Texas
When investors enter the U.S. investment startup location, they primarily consider the investment environment, market size, and operating costs. Wall Street released a report in January this year on the best and worst states for startups in 2023, evaluating key indicators for entrepreneurship across all 50 states, including financing, affordability, and tax rates. The results showed that Texas was ranked as the third most suitable state for startups in the U.S. due to its excellent employment environment, friendly regulatory policies, and lower state taxes.
The Texas government advocates for a low tax rate and a relaxed management model that avoids excessive intervention. A survey on small business friendliness across U.S. states shows that Texas has reached an A grade in terms of overall friendliness, talent welfare, and government regulations, particularly in entrepreneurship convenience, labor talent employment, and taxation.
Texas is known for its low taxes, but the reality is much more complex. Texas does not impose a state income tax (but federal income tax still applies to all residents), and to make up for this, Texas relies more on other forms of taxation such as sales tax and property tax. A report released by Ernst & Young in 2020 indicated that the total state and local taxes paid by individuals in Texas accounted for 3.5% of their income, significantly lower than the national average of 5.8%; relative to economic output, Texas's effective tax rate on businesses is 5.6%, higher than the national average of 4.7%, ranking 11th among states.
Image source: TTARA Team Research Report June20
2.1 Types of Taxes and Rates
According to the official website, Texas currently has 29 major types of taxes, including sales tax, franchise tax, property tax, etc.
Sales and Use Tax: Texas imposes a 6.25% state sales tax and use tax on most retail, leasing, and taxable services. Local tax jurisdictions (cities, counties, special purpose districts, and transportation authorities) may also impose up to 2% in sales tax and use tax, resulting in a maximum combined tax rate of 8.25%. Sales tax applies to most goods and services, with some grocery items (like flour, sugar, milk, eggs, etc.), prescription drugs, and others being exempt. In addition, Texas also levies sales tax on digital goods (like online subscription services).
Property Tax: Texas does not have a state property tax; property taxes are levied by local governments. Tax rates may vary across regions, typically ranging from 1.5% to 3%, with an average of 1.65%. Texas's property tax primarily applies to real estate, including residential, commercial buildings, and land owned by individuals and businesses.
Franchise Tax: Every taxable entity that establishes or conducts business in Texas must report and pay franchise tax. These entities include corporations, limited liability companies (LLCs), banks, state bank associations, savings and loan associations, partnerships, etc. Sole proprietorships (except single-member LLCs) and general partnerships do not report or pay franchise tax. The tax rates are 0.375% for retail and wholesale industries and 0.75% for other industries, depending on the type of business.
Vehicle Fuel Tax: Diesel and gasoline are taxed at 20 cents per gallon, and liquefied natural gas at 15 cents.
Additionally, there are hotel occupancy taxes, tobacco taxes, and others.
Table self-made, content: Texas tax details
2.2 Tax Obligors
Under Texas's tax system, taxpayers include individuals, businesses, and other legal entities. The specific tax burdens are concentrated in various aspects.
Individuals are not required to pay state-level personal income tax; however, they must pay sales tax on everyday purchases, with a state rate of 6.25%, and local governments may impose an additional tax of up to 2%, resulting in a total sales tax rate of 8.25% in some areas. Moreover, if individuals own real estate (such as properties or land), they must pay property tax as levied by local governments, with the average property tax rate in Texas being about 1.63% in 2023. Property tax revenue is primarily used for local public services such as education and infrastructure.
For businesses, Texas does not impose traditional corporate income tax, but all businesses operating in Texas must pay franchise tax, which is based on total revenue or profit, with tax rates varying by industry type. The tax rate for retail and wholesale industries is 0.375%, while it is 0.75% for other industries. Even tax-exempt businesses must still file annual tax returns. Additionally, businesses must collect and remit sales tax on taxable goods and services sold, applicable to most goods and some digital products such as software and media subscriptions.
2.3 Taxable Objects
The taxable object refers to specific behaviors, properties, or transaction types on which tax law is based, forming the foundation of government revenue. In Texas's tax system, various different behaviors, properties, and transactions have corresponding types of taxation. In general, this includes goods, services, real estate, business revenue, and specific consumer products.
2.4 Major Tax Incentives and Policies
Texas has been ranked by CEOs as the 'Best State for Business' for 20 consecutive years, due to its unique economic incentive policies and tax reduction benefits.
Texas does not impose corporate income tax or personal income tax, making it one of the states with the lowest tax burden in the U.S. The state also offers many tax incentives for businesses, including exemptions from sales tax on manufacturing machinery, research and development materials, software, and equipment, as well as franchise tax exemptions for solar equipment manufacturers, sellers, or installers. The state also provides property tax relief, license fee exemptions, local cash grants, and local funding to assist businesses relocating or expanding in the state. The Texas Enterprise Zone Program (EZP) is a state sales and use tax refund program designed to encourage private investment and job creation in economically distressed areas of the state.
Texas has strong and extensive economic development incentives. It is constantly dedicated to diversifying industrial development to maintain the vigorous growth of business enterprises. For example, the Texas Enterprise Fund (TEF) is one of the largest 'deal-closing' funds in the U.S., based on performance incentives. Additionally, there are extra rewards for major event funding, university research programs, job creation, new product development, skills training, and the education of relocated employees and their families. These incentives are aimed at rewarding those projects that contribute significant capital investment and job opportunities to the state's economy.
Companies relocating or expanding in Texas may qualify for asset-backed loans, leveraged loans, or tax-exempt bonds. This includes: the Texas Industrial Revenue Bond Program, the Texas Military Value Revolving Loan Fund, etc. Various types of grants are also available to Texas communities, certain Texas higher education institutions, and businesses.
In recent years, Texas has attracted a large number of cryptocurrency-related companies and projects. Major cryptocurrency mining companies like Riot Blockchain and Argo Blockchain have established mining operations in Texas. Blockchain technology companies like Blockcap have also moved their headquarters to Austin, Texas. So, what makes Texas so attractive to cryptocurrency businesses? Next, we will conduct a more detailed analysis of cryptocurrency companies from the perspective of taxation and regulation.
3. Texas Cryptocurrency Asset Taxation System
The status and regulation of crypto assets have gone through phased changes in Texas legislation, with new topics and viewpoints continuously emerging. As of now, there are no specific legal provisions in Texas regarding how crypto assets should be taxed. The taxation of crypto assets is primarily based on the existing tax system, applying different tax rates based on the characteristics of assets and their usage in different contexts, which allows the taxation of crypto assets to benefit from Texas's unique tax system advantages.
Image self-made, content: Changes in Texas cryptocurrency legislation
3.1 Definition and Qualitative Analysis of Crypto Assets
The legal definition of cryptocurrency in Texas is primarily established by the H.B. 4474 Act passed in 2021. This act clarifies the legal status of cryptocurrency, defining it as 'a representation of value in electronic form, intended to act as a medium of exchange, unit of account, or store of value.' This act amends Texas's Uniform Commercial Code (UCC), recognizing cryptocurrency as a type of digital asset similar to other financial assets. This definition ensures that cryptocurrency can be used for legitimate business transactions and provides legal protection and a regulatory framework.
Additionally, H.B. 4474 also defines the concept of 'control' over cryptocurrency, granting holders exclusive rights to their cryptocurrencies, including rights of use, transfer, and retention, ensuring the legal status of digital asset holders in transactions. Through this framework, Texas lays the groundwork for the legitimate application of cryptocurrency in business and finance, providing legal protection for both businesses and individuals.
3.2 Types of Taxes Involved with Texas Crypto Assets
The IRS classifies cryptocurrency and other 'virtual currencies' as property. Any cryptocurrency received must be reported as 'income' and 'capital gains' must be paid upon sale. Cryptocurrency and cryptocurrency-related activities in Texas must be carefully reported on the U.S. Individual Income Tax Return Form 1040 (f1040) to accurately document cryptocurrency transactions for the tax year.
While federal taxes still need to be paid, Texas residents can enjoy state-level income reductions. However, it is essential to note that other forms of taxation, such as sales tax and property tax, still apply to cryptocurrencies. If cryptocurrencies or other capital assets are sold in Texas at a price higher than their acquisition cost, capital gains tax needs to be paid (federal tax rate, without state tax). If capital losses are incurred, federal regulations allow these losses to offset gains. In Texas, inheriting crypto assets is exempt from estate tax. However, large estates may still be subject to federal estate tax. If goods and services purchased with cryptocurrency are taxable, sales tax will be levied on them. In this case, the tax rate depends on the type of goods or services procured rather than the use of cryptocurrency. In Texas, properties paid for with cryptocurrency are also subject to taxation. There is no state property tax, but properties purchased in the state must pay county and city taxes.
Texas does not have a state-level corporate income tax, meaning businesses are not required to pay income tax on their cryptocurrency trading profits at the state level, which is undoubtedly a huge attraction for cryptocurrency businesses and miners. However, Texas implements a margin tax, which is based on total revenue rather than traditional net profit tax. Any business with an annual revenue exceeding approximately $1.2 million may be required to pay a margin tax, with rates ranging from 0.375% to 0.75% depending on the type and size of the business. This may pose a certain tax burden for higher revenue but lower profit cryptocurrency companies, especially miners.
Cryptocurrency miners must pay special attention to Texas's property taxes. Cryptocurrency mining typically requires substantial mining machines and electrical facilities, which are regarded as 'tangible personal property' in Texas, thus subjecting them to local property taxes. Texas's property tax is relatively high, usually between 1.8% and 2.3%, with specific rates varying by county. When investing in hardware, it is essential to consider these tax costs. Additionally, cryptocurrency mining activities are viewed as income-generating at the federal level. Therefore, the market value of the cryptocurrency earned through mining must be reported as income on federal tax returns. This means that even though Texas does not impose state income tax, miners must still pay income tax at the federal level for their mining income. If miners subsequently sell these cryptocurrencies and realize a price appreciation, the appreciated portion will be classified as capital gains, which requires payment of federal capital gains tax.
For businesses engaged in cryptocurrency trading or providing related services, sales tax must also be considered. While transactions of virtual currencies themselves are not subject to sales tax (as virtual currencies are considered intangible assets), sales related to hardware, technical support services, and other activities associated with cryptocurrency operations may trigger sales tax obligations. For businesses selling mining equipment or providing mining hosting services, sales tax must be levied based on the type of products and services sold, at a base sales tax rate of 6.25%, plus local add-on taxes, resulting in an actual tax rate of up to 8.25%.
Additionally, federal tax compliance is also crucial. While Texas's tax system is relatively lenient, federal tax law requires accurate reporting regarding income, capital gains, and losses. The IRS specifically requires businesses to strictly report cryptocurrency transactions, mining income, and any sales of crypto assets. This means that not only do mining operations need to consider the electricity and hardware costs, but also how to accurately estimate the market value of the cryptocurrency earned and report it correctly on federal tax forms.
3.3 Cryptocurrency Tax Incentives
Currently, there are no provisions that directly indicate Texas's tax system offers specific tax reductions or incentives for cryptocurrency transactions, investments, or mining. The main tax incentive policies are concentrated in traditional industries and renewable energy, manufacturing, and other sectors. However, according to legal provisions, corresponding measures can be taken to obtain tax incentives for cryptocurrencies.
Hold assets for over a year before selling. Long-term capital gains tax is 25%, while short-term capital gains tax is 32%.
Recoup tax losses. By selling at a loss, one can realize the loss and use it to offset other capital gains or ordinary income of up to $3,000 per year. Losses can also be carried forward to future years.
Sell during low-income years. Low income also represents a low tax rate.
Additionally, the specific activities of cryptocurrency miners and related businesses may also qualify for some of Texas's existing tax incentives. Although these incentives are not specifically designed for the crypto industry, miners and businesses can take full advantage of existing tax policies through the following activities:
Construction of large data centers or mining facilities: Cryptocurrency miners often need to build or expand large-scale data centers to support their mining operations. According to Chapter 312 of the Texas Local Government Code, businesses can enter into agreements with local governments to receive property tax exemptions for up to ten years. This policy applies to capital-intensive facilities like newly built or expanded data centers, helping businesses reduce long-term operational costs.
High-energy-consuming mining activities: Cryptocurrency mining is an energy-intensive activity, and Texas's electricity policy provides flexible pricing options for such high-energy industries. The Electric Reliability Council of Texas (ERCOT) allows miners to negotiate long-term electricity contracts with electricity suppliers to obtain favorable rates. Additionally, if mining facilities choose to use renewable energy, such as solar or wind, they can enjoy further energy incentives.
Research and development of new mining technologies or blockchain applications: For cryptocurrency companies investing in the research and development of mining technologies or blockchain applications, Texas and federal-level research and development tax credit policies (R&D Tax Credit) apply. These businesses can use R&D expenditures for tax credits to reduce their overall tax burden.
Purchasing or leasing commercial real estate for mining: Cryptocurrency miners often need to purchase or lease large-scale industrial land or warehouses as mining facilities. Texas has property tax exemption policies, and according to Chapter 312 of the Texas Local Government Code, businesses can negotiate property tax exemptions with local governments, especially when investments are made for expanding business purposes. Additionally, businesses can utilize Freeport tax exemptions to be exempt from property taxes on inventory equipment when importing and storing mining machinery.
4. Texas Cryptocurrency Asset Regulatory System
With the introduction of laws and societal attention, Texas's cryptocurrency asset laws are continuously improving. However, like the tax system, there is currently no dedicated regulatory system focused on crypto assets. The existing regulatory framework covers some aspects of crypto assets but still has gaps that need to be filled. Nevertheless, Texas's cryptocurrency asset regulatory system and ingenuity are among the best in the nation.
4.1 Regulatory Entities
Although Texas is gradually introducing laws and regulations to strengthen the regulation of crypto assets, the overall regulatory system remains inadequate. Currently, the main agencies related to cryptocurrency in Texas include the Texas State Securities Board (TSSB), the Texas Department of Banking (TDB), and the Blockchain Working Group, each serving different functions concerning crypto assets, but a unified regulatory system has yet to be formed.
The TSSB is mainly responsible for the regulation of securities business related to crypto assets. If the issuance of cryptocurrency or tokens has the characteristics of securities, the TSSB is responsible for ensuring that these issuances and transactions comply with Texas's securities laws and preventing fraud and illegal fundraising activities. Its regulatory focus is on the investment and securities nature of token issuances.
The TDB focuses on regulating cryptocurrency custodial services. Texas allows state-chartered banks to provide cryptocurrency custodial services to clients, and the TDB ensures that these banks implement strict risk management measures to protect the safety of customer assets.
Image self-made, content source: Texas cryptocurrency-related regulatory system
Additionally, the TDB is also responsible for overseeing the fund management of cryptocurrency platforms. According to the H.B. 1666 Act, the TDB will require digital asset service providers to prove the sufficiency of their reserve funds to prevent the mixing of customer funds and platform operating funds.
The Blockchain Working Group was established by Texas through H.B. 1576, tasked with promoting the development and application of blockchain technology, particularly studying its potential applications in financial services, supply chain management, and providing policy recommendations to the state government. It does not directly participate in the regulation of cryptocurrencies, as its functions are more focused on technology and industrial development.
Although current laws and regulations do not fully cover all aspects of the cryptocurrency industry, especially in decentralized finance, cryptocurrency mining, and cryptocurrency payments, existing regulatory mechanisms still have significant gaps. Overall, the trend of cryptocurrency regulation in Texas is continually advancing, and the structure is gradually improving. In the future, Texas is expected to fill current regulatory gaps through continuous legislative and policy innovation, providing a more stable and secure operating environment for the cryptocurrency industry.
4.2 Regulatory Targets
In Texas, the regulatory system for the crypto industry remains loose and imperfect, but it has already taken the lead nationally. Its regulatory targets mainly include cryptocurrency exchanges and mining companies.
Cryptocurrency exchanges face comprehensive regulation covering multiple aspects, including reserve management and transparency of customer funds, as well as compliance with trading, security, and user protection.
With the passage of H.B. 1666, Texas requires exchanges to regularly submit reserve audit reports to ensure strict separation of customer assets and platform operating funds. This not only prevents the platform from misappropriating customer funds but also enhances protection for users' funds. Texas's reserve requirements for exchanges are similar to traditional banks' reserve requirements, ensuring that customers' digital assets can be withdrawn at any time.
Exchanges must also comply with federal and state anti-money laundering (AML) and know your customer (KYC) regulations, especially when involving cross-border transactions, to prevent illegal funding flows and money laundering activities. Large exchanges like Coinbase have already implemented high-level identity verification systems and anti-fraud tools on their platforms to ensure all users trade within the legal framework.
At the same time, exchanges must ensure that their operational activities do not violate U.S. securities laws. The TSSB has conducted strict compliance checks on token issuances (ICOs) and securities-related cryptocurrency projects. In 2018, Texas closed several unregistered token issuance projects due to their failure to provide adequate information to investors and the associated fraud risks. Texas's regulation of ICOs ensures investor rights and establishes strict requirements for exchanges to comply with digital asset issuance.
The regulation of cryptocurrency mining companies involves multiple decentralized aspects, including energy usage, environmental responsibilities, and other requirements.
The Texas Securities Board terminated an Australian mining company in 2018 for allegedly selling unregistered securities. The company itself had fraudulent and inducement characteristics.
Texas's low electricity prices and flexible electricity market have attracted a large number of mining companies, particularly with policy support in the renewable energy sector, making Texas gradually become one of the largest Bitcoin mining centers in the world. The regulation of electricity usage is one of the core issues faced by mining companies. Since cryptocurrency mining activities require substantial electricity consumption, Texas has strict energy usage monitoring and load management requirements for high-energy-consuming companies. Mining companies need to adjust their mining scale based on fluctuations in the Texas power grid and limit or halt some mining activities during peak electricity demand to support grid stability. In February 2021, Texas faced a severe winter storm that led to a grid collapse. At that time, several mining companies voluntarily reduced electricity consumption to ensure power supply for homes and hospitals. The Electric Reliability Council of Texas (ERCOT) managed the power scheduling for such high-energy-consuming industries.
At the same time, Texas also regulates the operational compliance of mining companies through environmental regulations. Large-scale mining activities may lead to environmental impacts, especially when traditional energy sources are used. Therefore, the Texas government actively promotes the transition of mining companies to renewable energy and encourages the use of wind and solar energy through tax incentives and policy support.
Other cryptocurrency-related intermediary services are also subject to regulation in Texas.
Cryptocurrency wallet service providers, investment funds, and cryptocurrency ATM operators are also under regulation, but a strict system has yet to be established. Wallet service providers must ensure the security of stored crypto assets, guard against hacking, and comply with KYC and AML requirements. Cryptocurrency funds and investment institutions must comply with securities laws, especially when dealing with tokenized assets or DeFi investments, and the TSSB will regulate them to ensure adequate information disclosure for investors. Cryptocurrency ATM operators must strictly adhere to AML and KYC regulations to prevent illegal money laundering activities through ATMs.
5. Summary and Outlook
Considering state-level systems, market environment, operational capabilities, and other factors, an increasing number of cryptocurrency companies (not limited to mining companies) are settling in Texas. Texas boasts rich economic and natural resources, a unique tax environment, and a leading regulatory framework. The state's abundant energy resources, high electricity output, and low electricity costs provide favorable conditions for cryptocurrency mining. Coupled with the absence of state income tax, it enhances the profit margins for businesses. Furthermore, Texas is at the forefront of legislative and regulatory efforts nationwide, continuously advancing regulations that ensure asset safety while preserving opportunities for innovation.
Looking ahead, with the continuous development of cryptocurrencies and blockchain technology, Texas is expected to further consolidate its global leading position in the crypto asset area and may introduce more innovative regulations to promote the standardized development of the industry.