Written by: Carlton, TaxDAO
1. Introduction to Colorado
Colorado, abbreviated as CO, is located in the western United States, spanning the eastern part of the Rocky Mountains. It covers an area of approximately 268,000 square kilometers, with a population of around 5.77 million (2020), ranking 8th in area and 21st in population among the 50 states. The state capital is Denver, which is also the largest city. Due to its rich natural resources and diverse economic structure, Colorado holds an important position in the U.S. landscape.
(Chart created by the author, data source: Wikipedia Colorado)
In 2022, Colorado's economic output was approximately $484 billion, accounting for 1.9% of the U.S. GDP. The state's economic development is highly diverse, mainly including six pillar industries: aerospace, biotechnology, energy, financial services, and information technology software. The high-tech industry in Colorado is very developed, particularly in cities like Denver and Boulder, which host numerous tech innovation companies such as Oracle, Bloomberg, and Newmont Mining Company. Colorado is also an important agricultural state in the U.S., with major agricultural products including beef, wheat, and corn. Additionally, with its famous natural landscapes like the Rocky Mountains, Colorado has become a world-renowned tourist destination, attracting millions of visitors each year.
(Chart created by the author, data source: FinCEN cryptocurrency business registration)
In terms of area, population, or economic total, Colorado is a relatively small state in the U.S., but the state's position in cryptocurrency activities is extremely important. According to data from the Financial Crimes Enforcement Network (FinCEN), registered cryptocurrency companies in Colorado account for approximately 33% of all registered cryptocurrency companies in the U.S. This phenomenon is mainly attributed to Colorado's proactive policy support, relaxed regulatory environment, and advantages in energy and industry, with the assistance of key figures being indispensable. Next, we will analyze Colorado's specific performance in these areas and how it has promoted the state to become an important center for the cryptocurrency industry.
2. Colorado's basic tax system
Colorado's tax system is characterized by simplicity and uniformity. Compared to some states' complex progressive tax systems, Colorado adopts a single tax rate, maintaining consistency for both individuals and businesses, making the state tax system simple and transparent. Overall, Colorado's tax burden is at a moderately low level, especially with competitive rates for income tax and sales tax at the national level.
2.1 Tax types and rates
The Colorado state government currently has 11 main categories of taxes, such as income tax, property tax, sales and use tax, etc. Some tax types and rates are summarized as follows:
2.2 Taxpayers
Under Colorado's tax system, taxpayers include individuals, businesses, and other legal entities, with tax burdens reflected in multiple aspects.
Individuals in Colorado must pay a state-level personal income tax of 4.4%, which is the uniform tax rate in the state, applicable to individuals at all income levels. Additionally, individuals must pay state-level sales tax when purchasing goods and certain services, with a base tax rate of 2.9%. Local governments may add additional taxes, making the total sales tax rate in some areas as high as 7.78%. If individuals own real estate (such as residential or commercial properties), they must pay property taxes levied by local governments, with Colorado's average property tax rate in 2023 being around 0.54%, which is relatively low compared to national levels.
For businesses, Colorado imposes the same uniform income tax of 4.4% as for individuals, regardless of size or income. Additionally, businesses are required to collect and remit sales tax on the sale of goods and services, which applies to most tangible goods and some digital goods (such as software, online services, etc.). Colorado also levies a vehicle ownership tax on businesses' vehicles, with tax rates adjusted based on the age and assessed value of the vehicle. Although Colorado does not have franchise taxes or similar business taxes beyond corporate income tax, businesses are still required to report their income and sales tax to ensure compliance with legal requirements.
2.3 Tax subjects
Colorado's tax subjects encompass goods, services, capital gains, and specific industries, with a wide variety of tax types. The income of individuals and businesses, the sale of goods, real estate, movable property, and specific services are all included in the tax system, forming a relatively comprehensive tax collection framework. In this system, local taxes and state-level taxes are combined, ensuring a reasonable distribution of taxes across different economic activities and industries, balancing the tax burdens on businesses and individuals.
Goods: Colorado imposes sales tax on most tangible goods, with a state-level tax rate of 2.9%, one of the lowest base rates in the U.S. Taxable items include everyday consumer products, clothing, and other common goods. Additionally, local governments can impose additional tax rates, leading to total sales tax rates in certain areas reaching 7.78%. Colorado's property tax applies to the real estate of individuals and businesses, including residential, commercial properties, and vacant land, with an average property tax rate of about 0.54% in 2023.
Services: While many services are not taxed in Colorado, certain services are still considered taxable. Taxable services include repair services, digital services (such as software subscriptions, streaming services), entertainment services, and cable television services. Furthermore, with the expansion of the digital economy, Colorado has started taxing an increasing number of virtual goods and services, such as cloud computing services and other online platform services. Businesses providing taxable services must collect and remit sales tax to ensure compliance with state regulations.
Capital gains: Colorado taxes the income and capital gains of individuals and businesses at a uniform rate of 4.4%. An individual's wages, salaries, interest income, and dividend income, as well as a business's operating income, are all subject to capital gains taxation. Capital gains tax (such as profits from selling stocks, real estate, and other assets) is also taxed according to personal income tax standards.
Movable property and transportation: Colorado levies a vehicle ownership tax on vehicles owned by individuals and businesses.
Specific consumer goods: Colorado imposes special excise taxes on certain specific consumer goods, such as fuel, tobacco, and alcohol.
2.4 Tax incentives
According to official sources, Colorado has a very extensive tax incentive policy, with a total of twenty-four major categories. As a state with a relatively low tax burden, Colorado attracts investors and residents through a series of incentive measures, creating a favorable operating environment for businesses. These include tax credits for advanced industry investments, employee ownership tax credits, enterprise zone contribution tax credits, personal benefit tax credits, and more.
2.4.1 Tax incentives for businesses
For businesses, Colorado offers numerous incentives covering capital investment, R&D innovation, and industry-specific tax credits. First, the Colorado Enterprise Zone Program provides significant tax incentives for businesses investing in economically disadvantaged areas. By expanding capital investment and hiring new employees in these areas, businesses can enjoy sales tax refunds, equipment procurement reductions, and other investment tax credits.
Colorado also offers significant tax incentives for renewable energy projects and research and development activities. Businesses investing in renewable energy sectors such as wind and solar can enjoy tax reductions on equipment procurement and installation, greatly reducing initial costs. For R&D-oriented companies, the state government provides R&D tax credits to support investments in technological innovation and high-tech fields. These tax credits encourage businesses to establish R&D centers in Colorado and promote the development of green energy and high-tech industries.
To further support technological innovation, Colorado has also established the Advanced Industries Accelerator Program, which provides direct financial support and tax incentives to businesses in fields such as aerospace, medical devices, and energy technology. Through this fund, businesses can obtain R&D funding and enjoy tax reductions, particularly in promoting cutting-edge technologies and innovative product development.
Additionally, Colorado provides capital investment incentives for capital-intensive investments. Businesses making long-term capital investments, such as building new factories or expanding production lines within the state, can receive corresponding tax reductions.
2.4.2 Tax incentives for individuals
For individuals, Colorado also offers various tax incentives. First, Colorado's flat income tax rate is 4.4%, which is relatively low and simple, applicable to residents and non-residents at all income levels, reducing the tax burden on individuals. Additionally, Colorado provides partial exemptions on Social Security income, allowing individuals aged 55 to 65 to exempt $20,000 of Social Security income, while individuals aged 65 and older can enjoy full exemption. This policy is particularly attractive to retirees and older residents, alleviating their tax pressure.
Colorado also offers property tax exemptions for specific groups, especially seniors and individuals with disabilities. Eligible residents can apply for property tax refunds to help alleviate the financial burden of property ownership.
3. Cryptocurrency asset taxation and regulatory system
According to a 2023 report by Business Facility on business site selection, Colorado ranks second in 'green jobs', while it ranks sixth in 'best business environment', 'technical talent', and other categories, and is even absent from rankings such as 'best business tax environment' and 'professional workforce training'. From the overall tax environment perspective, Colorado does not seem to have as low tax rates as Texas; why is the state so attractive for registered money service businesses (MSBs)?
Colorado has been at the forefront of creating a cryptocurrency-friendly legal framework, which may explain the state's attractiveness to MSBs. The state has introduced the Digital Token Act, which provides certain exemptions from state securities laws for cryptocurrencies, making it potentially easier for blockchain and cryptocurrency-focused businesses to operate. Below, we will provide a more detailed introduction to the state's taxation and regulation of the cryptocurrency industry.
(Chart source: Business Facilities’ 19th Annual Rankings Report: State Rankings)
Before introducing Colorado's cryptocurrency tax and regulatory framework, it is important to mention Governor Jared Polis. He was elected as Colorado's governor in November 2018 and officially took office in January 2019, serving until now. He is an important example of a tech entrepreneur entering politics, having shown a strong interest in cryptocurrency and blockchain technology during his time as a congressman and being a co-founder of the Congressional Blockchain Caucus. He is committed to making Colorado a center for blockchain innovation. During his campaign, he publicly outlined five policy goals, including promoting the widespread application of blockchain in business and government, developing secure blockchain infrastructure for elections, simplifying government services, and providing legal and financial frameworks to support cryptocurrency companies. Among them, his persistent Digital Token Act, by relaxing certain securities law regulations, further provided a broader entrepreneurial environment for cryptocurrency companies.
He is also committed to making Colorado the first state in the U.S. to accept cryptocurrency for state tax payments, and his goals are not limited to this, as he has also suggested allowing the use of cryptocurrencies to pay for services like driver's licenses and hunting permits. We have reason to believe that Colorado can quickly become the forefront of blockchain innovation in the U.S., thanks to his election and advocacy.
3.1 Cryptocurrency asset taxation
3.1.1 Definition
Colorado has not established a special tax category specifically for cryptocurrency assets. In line with U.S. federal policy, Colorado treats cryptocurrencies as property, subjecting them to tax rules similar to those for capital assets such as stocks and real estate. Therefore, when it comes to cryptocurrency transactions or sales, individuals and businesses must report capital gains tax or capital losses, rather than reporting under other tax categories. The capital gains tax on cryptocurrencies is divided into short-term and long-term capital gains based on the holding period, each subject to different tax rates, with short-term rates being higher and long-term rates relatively lower.
3.1.2 Taxes and tax rates involved with cryptocurrency assets
The absence of a special tax category for cryptocurrency assets means that Colorado's taxation of cryptocurrency assets is based on the basic tax system.
Capital gains tax: If the holding period of cryptocurrency is less than one year, the profits generated will be considered short-term capital gains and taxed at the individual's or business's ordinary income tax rate. Colorado's personal ordinary income tax rate is 4.4%, while federal rates are tiered based on individual income, reaching up to 37%. If the holding period of the cryptocurrency exceeds one year, long-term capital gains tax applies. The federal tax rate for long-term capital gains is 0%, 15%, or 20%, depending on the taxpayer's income level. Long-term capital gains tax rates are typically lower than short-term capital gains tax rates, encouraging investors to hold cryptocurrencies for the long term.
Sales tax: In Colorado, using cryptocurrency for transactions of goods or services is treated the same as payment in legal tender. Merchants accepting cryptocurrency payments must declare the transaction amount at the equivalent dollar exchange rate and pay the corresponding sales tax. The basic state sales tax rate is 2.9%, but with local taxes (such as municipal and county taxes) added, the actual total tax rate can reach between 7% and 11%. Therefore, using cryptocurrency to purchase goods or services does not exempt one from the obligation to pay sales tax. Similarly, trading cryptocurrencies as goods also requires the payment of sales tax.
Tax payment: Colorado is the first state in the U.S. to allow residents and businesses to pay state taxes using cryptocurrency. Since 2022, individuals and businesses can pay personal income tax, corporate tax, and other taxes through third-party platforms using cryptocurrencies like Bitcoin and Ethereum. These cryptocurrencies are instantly converted to dollars through payment processing agencies, and the state government does not hold cryptocurrencies directly. This policy reduces transaction costs while providing cryptocurrency users with more payment options.
Business tax: When businesses conduct cryptocurrency-related activities in Colorado, their profits must comply with state and federal business tax policies. For corporate income, Colorado's corporate income tax rate is 4.4%, the same as the rate applicable to ordinary businesses. Regardless of whether a business earns profits through a cryptocurrency exchange, mining, or other related activities, it must pay business tax based on the corresponding corporate income.
For individual miners or independent cryptocurrency service providers, Colorado requires income reporting and tax payments according to various tax regulations. First, the income from cryptocurrencies obtained through mining will be considered taxable income, estimated based on the market value of the cryptocurrency at the time of mining. This income is subject to Colorado's personal income tax, with a rate of 4.4%. At the federal level, this income must also be taxed according to income levels. Moreover, if individuals sell or trade the cryptocurrencies obtained through mining, the capital gains must be subject to capital gains tax.
In addition, individual miners or self-employed cryptocurrency practitioners are also required to pay self-employment tax, which includes Social Security tax and Medicare tax, with a total rate of 15.3%. This tax burden is particularly significant for those earning income through mining or blockchain services. If individual miners or independent practitioners operate on a larger scale and employ staff, they must also consider payroll taxes, including federal and state-level Social Security and Medicare taxes, as well as withholding personal income tax.
For cryptocurrency mining businesses or blockchain service companies, tax liabilities are more diverse. The profits of the business are subject to Colorado's corporate income tax, and the profits gained from selling cryptocurrencies after generating revenue through mining or blockchain services are also subject to capital gains tax. Similarly, if a business uses imported equipment or equipment procured from other states for mining or providing services without paying local sales tax, it must pay use tax. The tax rate for use tax varies by region, usually between 7% and 11%. Companies that provide digital services or cryptocurrency trading platforms may need to levy sales tax on their service revenue, especially for consumers within Colorado.
3.1.3 Tax incentives
Based on IMF statistical analysis, by 2022, cryptocurrency mining and data centers accounted for 2% of global electricity demand. This ratio may rise to 3.5% within three years, equivalent to the current electricity consumption of Japan, the world's fifth-largest power user.
(Chart created by the author, original image: Chart of the Week, MACRO-FISCAL POLICY Carbon Emissions from Al and Crypto Are Surging and Tax Policy Can Help)
Cryptocurrency mining and blockchain technology heavily rely on data centers and vast amounts of energy, similar to quantum computing and AI, both of which have extremely high demands for power and computational resources. Colorado, as a potential tech hub in the U.S., has shown strong support for high-tech industries. For example, in the field of quantum technology, the Governor of Colorado announced a series of new tax credit incentives during the 'Mountain West Quantum Summit' in Denver, such as tax credits for purchasing equipment and establishing next-generation computing laboratories, and created loan guarantee programs to help startups obtain funding, aiming to attract quantum technology companies.
Similarly, the cryptocurrency asset industry can take advantage of local tax incentives while developing in Colorado—although these policies are not entirely targeted at the cryptocurrency industry. The following tax incentives need to be noted for cryptocurrency miners and businesses:
Property tax exemptions: According to Section 30-11-132 of Colorado's Local Government Law, local governments can encourage businesses to conduct long-term capital investments in specific areas by providing property tax exemptions or refunds. Cryptocurrency mining businesses, which rely on large-scale data centers for intensive calculations, fall under this category of capital-intensive projects. By entering into agreements with local governments, these businesses can obtain property tax exemptions for up to 10 years. Typically, these exemption policies apply to investment projects identified as 'Areas of Specific Local Concern', aimed at promoting local economic development.
R&D expense deductions: Colorado revised statute §31-20-101.7 provides significant tax incentives for companies engaged in technological innovation. This policy allows businesses to deduct 25% of their R&D expenditures from their state tax liabilities. This is particularly important for the cryptocurrency industry, especially for companies dedicated to developing new blockchain applications, enhancing mining efficiency, and optimizing encryption algorithms. By applying for R&D tax credits, cryptocurrency companies can offset some of their R&D expenditures against taxes, reducing their financial burden.
Cryptocurrency tax payments: Colorado has become the first state in the U.S. to allow taxpayers to pay state taxes using cryptocurrencies. Although this does not directly reduce taxes, the ability to pay through cryptocurrencies provides more tax payment convenience for businesses whose primary wealth is in digital assets. This applies to various types of taxes, including income tax, sales tax, and use tax.
3.2 Cryptocurrency asset regulation
3.2.1 Development history
Compared to Colorado's tax policies, its extensive regulatory system and open innovative business environment are more attractive to cryptocurrency companies. Colorado's regulatory changes regarding cryptocurrency have occurred over the following periods:
(Chart created by the author, content: Timeline of Colorado's cryptocurrency regulatory events)
As early as 2014, Colorado passed the Digital Currency Exemption Act for Money Transmission, which rules that businesses that only handle digital currencies (such as Bitcoin) do not need to apply for a money transmission license. However, if a business also deals with traditional currencies or acts as an intermediary for the buying and selling of digital currencies, it must obtain a money transmission license.
In 2017, Colorado began focusing on the legal framework for cryptocurrencies, when the state government first classified cryptocurrencies as a commodity and regulated them under the Colorado Securities Law. At that time, all businesses engaged in the buying, selling, or transferring of cryptocurrencies were required to obtain a money transmission license to ensure compliance with federal regulations such as anti-money laundering (AML) and know your customer (KYC).
In 2018, the Colorado Securities Division issued guidelines regarding how existing securities laws apply to cryptocurrency offerings. Companies and individuals providing cryptocurrency investments in Colorado must comply with state securities registration requirements and disclose all relevant information to potential investors.
In 2019, Colorado passed the landmark Colorado Digital Token Act, which exempts certain cryptocurrency tokens from securities registration and broker licensing requirements. This provided a more relaxed environment for blockchain and cryptocurrency startups, promoting the development of the industry. It aims to encourage the innovative application of blockchain technology and clarifies the regulatory scope of digital assets.
In 2020, Colorado established a fintech sandbox program, allowing cryptocurrency companies to test new products and services in a controlled regulatory environment. This not only provides more innovation space for cryptocurrency and blockchain companies but also ensures that businesses can develop under regulation, avoiding heavy regulatory burdens.
Since 2022, businesses and individuals can use cryptocurrency to pay state taxes, including income tax and sales tax. This policy marks a unique breakthrough in the acceptance of cryptocurrency in the U.S., encouraging more businesses and individuals to use digital currency within a legal framework.
It is clear that Colorado is proactive and progressive in its regulation of the crypto industry, and we have reason to believe that the state's legal provisions will continue to be updated in the future, with the regulatory environment and cryptocurrency usage continuously improving.
3.2.2 Regulatory entities
Colorado's cryptocurrency regulatory framework is primarily based on state laws and regulations, as well as guidance from federal agencies such as the IRS and SEC.
Mainly including:
(Money Transmission Act): Any individual or entity engaging in money transmission (including transferring virtual currencies) must obtain a license from the Colorado Division of Banking.
(Check Selling Act): Selling or issuing currency instruments such as cryptocurrencies must comply with sales laws) (Uniform Electronic Transactions Act) (UETA, which recognizes electronic signatures and records, which may include transactions involving digital assets.
Colorado Securities Law: The sale or issuance of securities (including certain types of cryptocurrencies) must comply with this law, registering with or obtaining an exemption from the Colorado Securities Commissioner.
Digital Token Act and its amendments: Exempts certain digital tokens in the state from securities laws and regulations, making it easier for companies to raise funds through initial coin offerings (ICOs) or other digital token offerings; Senate Bill 20-109 added additional consumer protection measures, requiring businesses seeking exemptions under the Act to disclose their token issuance status and submit annual reports to the Colorado Securities Commissioner.
As well as guidance from the Securities Division, IRS guidelines, SEC guidelines, etc.
Colorado has not yet developed a comprehensive regulatory framework specifically for cryptocurrencies. However, existing state laws and federal guidelines play an important role in regulating the state's cryptocurrency industry. The government agencies involved include:
Colorado Securities Division: The Securities Division is responsible for regulating the sale and issuance of securities, including certain types of cryptocurrencies.
Colorado Department of Regulatory Agencies (DORA): DORA regulates various industries in the state and designates the Securities Division to oversee cryptocurrency activities.
Colorado Department of Revenue: The Department of Revenue manages and enforces taxation, including income tax on cryptocurrency transactions.
Colorado Banking Board: The state banking board regulates and supervises state-chartered banks, trust companies, and other financial institutions that handle virtual currencies.
Banking Division: As part of DORA, the Banking Division regulates state-chartered credit unions and trust companies that provide virtual currency exchange services.
Attorney General's Office—Consumer Protection Division: The Consumer Protection Division investigates complaints related to fraud or deception involving virtual currencies.
3.2.3 Regulatory subjects
Under Colorado's gradually improving regulatory system, the subjects of regulation have also become more diverse, including:
Cryptocurrency exchanges and wallet service providers: Platforms that help users buy, sell, and store cryptocurrencies. According to federal regulations and Colorado state laws, exchanges must comply with money transmission laws and obtain money transmission licenses. These businesses are subject to AML and KYC regulations to ensure that transactions are legal and compliant.
Digital token issuing companies: Under the Digital Token Act, companies issuing digital tokens can be exempted from certain securities law constraints when their tokens are used for consumption (rather than investment), but are still subject to basic anti-fraud legal regulations. These companies must ensure that their token issuances do not involve investment fraud and comply with relevant consumer protection regulations at the time of issuance.
Cryptocurrency miners and mining facilities: Mining businesses are directly regulated by securities or financial regulations when conducting transactions of cryptocurrency assets, and due to their high energy consumption characteristics, crypto mining facilities are indirectly regulated by state energy policies and environmental regulations. Mining facilities must comply with relevant business and tax regulations to ensure legal and compliant operations.
Fintech and blockchain startups: In Colorado, many fintech companies use blockchain technology for innovation. Businesses participating in the fintech sandbox program test new technologies and products under less regulation, which provides regulatory support and innovation space for cryptocurrency-related startups, but they must also comply with basic consumer protection and privacy regulations.
Individual or institutional users: Individuals and institutions engaging in cryptocurrency trading, especially investment transactions, need to report capital gains tax or other relevant taxes at the state or federal level.
4. Summary and outlook
With its open policies and regulatory framework, Colorado has become a leader in the cryptocurrency field in the U.S. The state effectively reduces the operating costs of high-tech companies, including cryptocurrency businesses, through flexible property tax exemptions, R&D tax credits, equipment investment incentives, etc., providing substantial support specifically for capital-intensive and energy-intensive mining activities. Additionally, the Digital Token Act simplifies compliance processes, provides compliance guidance, and encourages innovative development. The regulatory system covers a wide range, ensuring the standardized operation of the cryptocurrency ecosystem, from exchanges to mining enterprises.
As the blockchain and cryptocurrency markets continue to expand, Colorado is expected to maintain its innovative leadership. In the future, the state may attract more of the world's leading cryptocurrency companies by expanding tax incentives and optimizing the fintech sandbox program. At the same time, as energy usage and environmental requirements increase, the state may implement more green energy incentives for energy-intensive mining companies to balance industry growth with environmental responsibility. This will further consolidate its leading position in the field of blockchain and cryptocurrency assets.
