Colorado: an inclusive, open encryption technology hub

Source: TaxDAO

1. Introduction to Colorado

Colorado, abbreviated as CO, is located in the western United States, spanning the eastern Rocky Mountains. It covers an area of about 268,000 square kilometers and has a population of about 5.77 million (2020). Among the 50 states in the United States, it ranks 8th in terms of area and 21st in terms of population. The state capital and largest city is Denver. Due to its abundant natural resources and diverse economic structure, Colorado holds an important position in the map of the United States.

(The chart is homemade, data source: Wikipedia Colorado)

In 2022, the total economic output of Colorado is about $484 billion, accounting for 1.9% of the US GDP. The economic development of Colorado is characterized by strong diversity, mainly including six pillar industries: aviation, aerospace, biotechnology, energy, Financial Service, and information technology software. The state’s high-tech industry is highly developed, especially in cities like Denver and Boulder, where a large number of technology innovation companies such as Oracle, Bloomberg, and Newmont Mining are gathered. Colorado is also an important agricultural state in the United States, with major agricultural products including beef, wheat, and corn. In addition, with famous natural landscapes such as the Rocky Mountains, Colorado has become a world-renowned tourist destination, attracting millions of visitors annually.

(Self-made chart, data source: FinCENCryptocurrency enterprise registration)

Regardless of its size, population, or economic output, Colorado is a relatively small state in the United States. However, its position in the encryption activities is extremely important. According to data from the Financial Crimes Enforcement Network (FinCEN), approximately 33% of registered encryption companies in the United States are based in Colorado. Analysis indicates that this phenomenon is mainly due to Colorado’s proactive policy support, relaxed regulatory environment, and its advantages in energy and industry. The assistance of key figures is also indispensable. Next, we will analyze in detail the specific performance of Colorado in these aspects and how it is driving the state to become an important center for the encryption industry.

2. Basic Tax System in Colorado

The tax system in Colorado is characterized by simplicity and uniformity. Compared to the complex progressive tax systems in some states, Colorado adopts a single tax rate for both individuals and businesses, ensuring consistency in tax rates. This makes Colorado’s tax system simple and transparent. Overall, the tax burden in Colorado is at a moderately low level, especially in terms of income tax and sales tax rates, which are competitive nationwide.

2.1 Tax Categories and Tax Rates

The official website of Colorado currently has 11 major tax categories, such as income tax, property tax, sales and use tax, etc. The summary of some tax categories and tax rates are as follows:

2.2 Taxpayer

Under the tax system in Colorado, taxpayers include individuals, businesses, and other legal entities, and the tax burden is reflected in multiple aspects.

Individuals in Colorado are required to pay a 4.4% state personal income tax, which is the uniform tax rate in Colorado and applies to individuals at all income levels. In addition, individuals are required to pay state sales tax when purchasing goods and certain services, with a base tax rate of 2.9%. Local governments may also impose additional taxes, resulting in a total sales tax rate of up to 7.78% in certain areas. If individuals own real property (such as residential or commercial property), they are required to pay property taxes levied by local governments. In 2023, the average property tax rate in Colorado is approximately 0.54%, which is relatively low compared to the national level.

For enterprises, Colorado imposes the same 4.4% flat income tax rate as individuals, regardless of the size or income of the business. In addition, 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 motor vehicle ownership taxes on businesses based on the age and assessed value of the vehicles, with tax rates adjusted accordingly. While Colorado does not have franchise taxes or similar business taxes other than corporate income tax, businesses are still required to report their income and sales taxes to ensure compliance with the law.

2.3 Taxable Objects

Colorado’s tax targets include goods, services, capital gains, and specific industries, with a wide range of types of taxation. Personal and corporate income, sales of goods, real estate, personal property, specific services, etc. are all included in the tax system, forming a comprehensive tax collection framework. In this trap system, local taxes are combined with state taxes to ensure a reasonable distribution of taxes for different economic activities and industries, and a relatively balanced tax burden for enterprises and individuals.

Commodities: Colorado imposes a sales tax on most tangible goods, with a state tax rate of 2.9%, one of the lowest base tax rates in the United States. Taxable items include everyday consumer goods, clothing, and other common products. In addition, local governments can impose additional tax rates, resulting in a total sales tax rate of up to 7.78% in certain areas. Colorado’s property tax applies to real estate owned by individuals and businesses, including residential, commercial properties, and vacant land, with an average tax rate of about 0.54% in 2023.

Service: Although 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. In addition, as the digital economy expands, Colorado has also started taxing more virtual goods and services, such as cloud computing services and other online platform services. For businesses that provide taxable services, sales tax must be collected and remitted on their behalf to ensure compliance with state regulations.

Capital Gains: Colorado taxes individuals and businesses on their income and capital gains at a flat rate of 4.4%. Individual wages, salaries, interest income, and dividend income, as well as business revenue, are all subject to taxation as capital gains. Capital gains tax (such as profits from the sale of stocks, real estate, etc.) is also taxed at the standard individual income tax rate.

Chattel and Transportation: Colorado levies motor vehicle ownership tax on vehicles owned by individuals and businesses.

Specific Consumer Goods: Colorado imposes special consumption taxes on certain specific consumer goods, such as fuel, tobacco, and alcohol.

2.4 Tax Incentives

According to the official website, Colorado has many tax incentives, with a total of twenty-four categories. As a state with a relatively low tax burden, Colorado attracts investors and residents through a series of incentive measures and creates a favorable operating environment for businesses. These include advanced industry investment tax credits, employee stock ownership tax credits, enterprise zone contribution tax credits, and personal welfare tax credits.

2.4.1 Tax Incentives for Enterprises

For businesses, Colorado offers a variety of incentives, including capital investments, research and development innovation, and industry-specific tax credits. First, Colorado’s Enterprise Zone Program provides significant tax benefits to businesses investing in economically underdeveloped areas. Businesses can expand capital investments and hire new employees in these areas to enjoy sales tax refunds, equipment purchase exemptions, and other investment tax credits.

Colorado also offers significant tax incentives for renewable energy projects and research activities. Companies investing in renewable energy fields such as wind and solar power can enjoy tax exemptions for equipment procurement and installation, greatly reducing the initial costs. For research-oriented enterprises, the state government provides Research and Development (R&D) Tax Credit to support investment in technological innovation and high-tech fields. These tax exemptions encourage companies to establish research and development centers in Colorado, promoting the development of green energy and high-tech industries.

To further support technological innovation, the state of Colorado has also established the Advanced Industries Accelerator Program. The program provides direct funding and tax incentives to companies in fields such as aerospace, medical devices, and energy technology. Through this program, companies can obtain research and development funding and enjoy tax reductions, especially in driving cutting-edge technology and innovative product development.

In addition, Colorado offers capital investment incentives for capital-intensive investments. Companies that make long-term capital investments in the state, such as building new factories or expanding production lines, are eligible for corresponding investment tax breaks.

2.4.2 Tax Benefits for Individuals

For individuals, Colorado also offers a variety of tax incentives. First, Colorado has a flat income tax rate of 4.4%, which is relatively low and simple, applicable to both residents and non-residents at all income levels, reducing the tax burden for individuals. In addition, Colorado provides partial exemptions for social security income, with individuals aged 55 to 65 exempt from $20,000 of social security income, and individuals aged 65 and above enjoying complete tax exemption. This policy is particularly attractive to retirees and elderly residents, alleviating their tax burden.

Colorado also provides property tax relief to specific populations, particularly the elderly and disabled. Eligible residents can apply for property tax refunds to help alleviate the financial burden of property ownership.

3. encryption asset tax system and regulatory system

According to a report from Business Facility 2023 on business site selection, Colorado ranks second in ‘green jobs’, sixth in ‘best business environment’, ‘technology talent’, and so on. In addition, there is no mention of ‘best business tax environment’, ‘professional labor training’, etc. Looking at the overall tax environment, it seems that Colorado does not have the low tax rate like Texas. Why is the state so attractive to registered money services businesses (MSBs)?

Colorado has been at the forefront of creating an encryption-friendly legal framework, which may explain its appeal to MSBs. The state has introduced the Digital Token Act, which provides certain exemptions from state securities laws for cryptocurrencies, potentially making it easier for blockchain and cryptocurrency-focused businesses to operate. Below, we will provide a more detailed overview of the state’s taxation and regulation of the encryption industry.

(Chart Source: Business Facilities’ 19th Annual Rankings Report: State Rankings)

Before introducing Colorado’s cryptocurrency tax and regulatory framework, it’s important to mention Governor Jared Polis. He was elected governor of Colorado in November 2018 and was officially sworn in in January 2019 for re-election. He is an important example of a tech entrepreneur entering politics, and Polis has already shown a strong interest in Cryptocurrency and Block Chain technology during his time as a member of Congress, becoming a co-founder of the Congressional Block Caucus. He is committed to making Colorado a hub for blockchain innovation. As early as the election campaign, he publicly and clearly stated five policy goals, including: promoting the widespread adoption of the Block Chain in business and government, developing the Block Chain infrastructure for election security, simplifying government services, and providing legal and financial framework support for encryption companies. Among them, the Digital Token Law, which he insisted on, further provides a broader entrepreneurial environment for cryptocurrency companies by deregulating the securities laws of certain tokens.

He is also committed to making Colorado the first state in the United States to accept Crypto Assets for state taxes. His goal is not limited to this, but also proposes to allow the use of Crypto Assets to pay for services such as driver’s licenses and hunting. We have reason to believe that Colorado’s rapid development as a frontier for blockchain innovation in the United States is inseparable from his election and promotion.

3.1 encryption asset taxation

3.1.1 Definition

Colorado does not have a special tax category for encryption assets in cryptocurrency taxation. Consistent with the policy of the US federal government, Colorado treats cryptocurrency as property and applies tax rules similar to capital assets such as stocks and real estate. Therefore, individuals and businesses must declare capital gains or losses when it comes to cryptocurrency transactions or sales, rather than reporting them under other tax categories. Capital gains tax on cryptocurrency is divided into long-term capital gains and short-term capital gains based on the holding period, and different tax rates apply to each, with higher rates for short-term gains and relatively lower rates for long-term gains.

3.1.2 Assets Related Tax Types and Rates for encryption

The absence of a special tax category for encryption assets means that the taxation of encryption assets in Colorado is based on the basic tax system.

Capital Gains Tax: If the holding period of Cryptocurrency is less than one year, the resulting profits will be treated as short-term capital gains and taxed at the individual or corporate ordinary income tax rate. The individual ordinary income tax rate in Colorado is 4.4%, and the federal tax rate is paid in tiers based on individual income, with a maximum rate of 37%. If the holding period of 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 generally lower than short-term capital gains tax rates, which encourages investors to hold Cryptocurrency for the long term.

Sales Tax: In Colorado, using Crypto Assets to transact goods or services is no different from using fiat currency. After accepting Crypto Asset payments, merchants are required to declare the transaction amount in US dollars at the equivalent Exchange Rate and pay the corresponding sales tax. The basic sales tax rate in the state is 2.9%, but with the increase of local taxes (such as municipal and county taxes), the actual total tax rate can reach 7% to 11%. Therefore, using Crypto Assets to purchase goods or services in daily consumption does not exempt the obligation to pay sales tax. Similarly, buying and selling Crypto Assets as commodities also requires the payment of sales tax.

Payment of Taxes: Colorado is the first state in the United States to allow residents and businesses to pay state taxes with cryptocurrency. Starting from 2022, individuals and businesses can use cryptocurrencies such as BTC, ETH, and others to pay personal income taxes, corporate taxes, and other taxes through third-party platforms. These cryptocurrencies will be instantly converted to USD by payment processors, and the state government will not directly hold cryptocurrencies. This policy reduces transaction costs and provides cryptocurrency users with more payment options.

Business Tax: When a company conducts Cryptocurrency-related business in Colorado, its profits are subject to state and federal business tax policies. For corporate income, the tax rate in Colorado is 4.4%, consistent with the rate applicable to ordinary businesses. Whether a company earns profits through Cryptocurrency exchange, Mining, or other related businesses, it must ultimately pay business tax based on the corresponding corporate income.

For individual Miners or independent Crypto Asset service providers, Colorado requires reporting income and paying taxes according to multiple tax regulations. First, the Cryptocurrency income obtained through Mining by individuals will be treated as taxable income, estimated based on the market value of the Cryptocurrency at the time of Mining. This income needs to be subject to Colorado’s individual income tax at a rate of 4.4%. At the federal level, this income also needs to be subject to federal income tax based on the scale of income. In addition, if individuals sell or trade the Cryptocurrency obtained through Mining, their capital gains are subject to capital gains tax.

In addition, individual Miners or self-employed Cryptocurrency practitioners are also required to pay self-employment taxes, including Social Security taxes and Medicare taxes, with a total tax rate of 15.3%. This tax burden is particularly important for those who earn income through Mining or blockchain services. If individual Miners or independent practitioners operate on a larger scale and employ staff, they also need to consider payroll taxes, including Social Security and Medicare taxes at the federal and state levels, as well as withheld and paid individual income taxes.

For Cryptocurrency Mining companies or blockchain service companies, the tax liabilities are more diverse. Profits of businesses are subject to Colorado corporate income tax, as are profits from the sale of cryptocurrency, after generating earnings through mining or blockchain services. Similarly, if a business uses imported equipment or equipment sourced from another state for mining or providing services, and does not pay local sales tax, the business needs to pay excise tax. The GST rate varies from region to region and is usually between 7% and 11%. Businesses that provide digital services or cryptocurrency trading platforms may be subject to sales tax on their service income, especially for consumers within Colorado.

3.1.3 Tax incentives

Based on statistical analysis by the IMF, by 2022, encryptionMining and data centers will account for a total of 2% of global electricity demand. This proportion could rise to 3.5% within three years, equivalent to the current electricity consumption of Japan, the world’s fifth-largest electricity user.

（Self-made chart, original chart: Chart of the Week, MACRO-FISCAL POLICY Carbon Emissions from Al and Crypto AreSurging and Tax Policy Can Help）

CryptocurrencyMining and blockchain technology are highly dependent on data centers and large amounts of energy, and are both industries with extremely high demand for power and computing resources, along with Quantum Computing and AI. As a potential technology hub in the United States, Colorado has shown strong support for the high-tech industry. For example, in the field of quantum technology, the governor of Colorado announced a series of new tax credit incentives at the “Mountain West Quantum Elevation Summit” in Denver, such as tax credits for the purchase of equipment and the establishment of next-generation computing labs, and the development of a loan guarantee program to help startups access funding, with the aim of attracting quantum technology companies to settle in.

Similarly, the encryption asset industry can take advantage of relevant tax incentives in the state of Kansas when developing, although these policies are not specifically targeted at the Cryptocurrency industry. For encryption asset Miners and businesses, the following tax incentives need to be noted:

Property Tax Relief: According to Section 30-11-132 of the Colorado Local Government Act, local governments can encourage long-term capital investment in specific areas by providing property tax relief or refunds. Crypto mining enterprises, due to their reliance on large-scale data centers for intensive computing, fall under this capital-intensive category. By signing a protocol with local governments, these enterprises can enjoy up to 10 years of property tax relief. Typically, these relief policies apply to investment projects identified as ‘Areas of Specific Local Concern’ and aim to promote local economic development.

R&D Expense Deduction: Colorado Revised Statutes §31-20-101.7 provides significant tax incentives for enterprises engaged in technological innovation. This policy allows enterprises to deduct 25% of their R&D expenses from their state taxes. This is particularly important for the Crypto Assets industry, especially for companies dedicated to developing new blockchain applications, improving mining efficiency, and optimizing Encryption Algorithm. By applying for R&D tax credits, Crypto Assets enterprises can offset a portion of the expenses for technical R&D against taxes, thus reducing the financial burden on enterprises.

Cryptocurrency Tax Payment: Colorado has become the first state in the United States to allow taxpayers to pay state taxes using cryptocurrency. Although this will not directly reduce taxes, paying taxes through cryptocurrency can provide more tax payment convenience for businesses whose main wealth is in digital assets. This applies to various taxes such as income tax, sales tax, and use tax.

3.2 Encryption Asset Supervision

3.2.1 Development History

Compared with Colorado’s tax policies, its extensive regulatory system and open and innovative business environment are more attractive to cryptocurrency companies. Colorado has gone through the following periods of regulatory changes for cryptocurrency:

(Self-made chart, content: development process of Colorado encryption regulation)

As early as 2014, Colorado passed the Digital Money Exemption Act for Determining Currency Transfers, which stipulates that businesses that only deal with Digital Money (such as BTC) do not need to apply for a currency transfer license. However, if the business also deals with traditional currency or acts as an intermediary between buyers and sellers of Digital Money, it must obtain a currency transfer license.

In 2017, Colorado began to follow the legal framework of Crypto Assets, and the state government first treated Crypto Assets as a commodity and regulated it in the “Colorado Securities Law”. At that time, all businesses engaged in the buying, selling, or transfer of Crypto Assets in the state were required to obtain a money transmission license to ensure compliance with Anti-Money Laundering (AML) and Know Your Customer (KYC) federal regulations.

In 2018, the Colorado Securities Division issued guidelines on how existing securities laws apply to the issuance of Crypto Assets. Companies and individuals offering Crypto Asset investments in Colorado must comply with state securities registration requirements and disclose all relevant information to potential investors.

In 2019, the state of Colorado passed the landmark Colorado Digital Token Act, which exempts certain encryption tokens from securities registration and broker-dealer licensing requirements. This provides a more relaxed environment for blockchain and cryptocurrency startups and promotes the development of the industry. It aims to promote the innovative application of blockchain technology and clarify the regulatory scope of digital assets.

In 2020, Colorado established a financial technology 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 companies can develop under regulation, avoiding heavy regulatory burdens.

From 2022 onward, both businesses and individuals can use Crypto Assets to pay state taxes, including income tax and sales tax, etc. This policy marks a unique breakthrough in Cryptocurrency acceptance within the state, encouraging more businesses and individuals to use Digital Money within a legal framework.

It is not difficult to see that Colorado’s regulation of the encryption industry is positive and progressive. We have reason to believe that the state’s laws and regulations will continue to be updated in the future, and the regulatory environment and the use of Crypto Assets will continue to improve.

3.2.2 Regulatory Authority

Colorado’s Cryptocurrency regulatory framework is mainly based on state laws and regulations, as well as guidance from federal agencies such as the Internal Revenue Service (IRS) and the Securities and Exchange Commission (SEC).

Its main includes:

“Money Transmission Act”: Any individual or entity engaged in money transmission (including the transmission of Virtual Money) must obtain the approval of the Colorado Division of Banking.

“Check Sale Law”: Sales or issuance of currency tools such as Cryptocurrency need to comply with sales laws) “Uniform Electronic Transactions Act” (UETA, recognizing electronic signatures and records, which may include transactions involving digital asset.

Colorado Securities Law: The sale or issuance of securities (including certain types of Crypto Assets) must comply with the Act and be registered with or exempted by the Colorado Securities Commissioner.

The Digital Token Act and its amendments: exempt certain digital tokens in the state from securities laws and regulations, making it easier for companies to raise funds through initial token issuance (ICO) or other digital token issuance; Senate Bill 20-109 adds additional consumer protection measures, requiring companies seeking exemptions under the bill to disclose their token issuance activities and submit annual reports to the Colorado Securities Commissioner.

As well as Securities Department Guidelines, IRS Guidelines, Securities and Exchange Commission Guidelines, etc.

Colorado has not yet established a comprehensive regulatory framework specifically for cryptocurrency. However, the state’s existing laws and federal guidelines play an important role in regulating the cryptocurrency industry in the state. The government agencies involved include:

Colorado Division of Securities: The Division of Securities is responsible for regulating the sale and issuance of securities, including certain types of Crypto Assets.

Colorado Department of Regulatory Agencies (DORA): DORA regulates various industries in the state and designates the Division of Securities to oversee Crypto Assets activities.

Colorado Department of Revenue: The Department of Revenue manages and enforces taxes, 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 involved in the handling of Virtual Money.

Banking Department: As part of DORA, the Banking Department oversees state-chartered credit unions and trust companies that provide Virtual Money exchange services.

The Office of the Attorney General–Consumer Protection Division: The Consumer Protection Division investigates complaints related to fraud or deceptive practices involving Virtual Money.

3.2.3 Regulatory Object

Under the gradually improved regulatory system in Colorado, the regulated entities have become more diverse, including:

Cryptocurrency exchange and Wallet service provider: The platform helps 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 need to adhere to AML and KYC regulations to ensure legal compliance in transactions.

Digital Token Issuance Company: According to the “Digital Token Act”, companies that issue digital tokens can be exempted from some securities law constraints when their tokens are used for consumption (not investment), but still subject to basic anti-fraud legal supervision. These companies need to ensure that token issuance does not involve investment fraud and complies with relevant consumer protection regulations when issuing.

CryptocurrencyMiner and Mining Facilities: When Mining companies engage in Crypto Assets transactions, they are directly regulated by securities or financial regulations. Additionally, due to their high energy consumption characteristics, Mining Farms are indirectly regulated by state energy policies and environmental regulations. Mining Farms must comply with relevant business and tax regulations to ensure legal Compliance.

FinTech and Blockchain Startups: In Colorado, many FinTech companies are using Blockchain technology for innovation. Companies participating in the FinTech sandbox program are able to test new technologies and products with less regulation, providing 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 engaged in Cryptocurrency trading, especially investment trading, are required to declare capital gains tax or other related taxes at the state or federal level.

4. Summary and Outlook

Colorado has become a leader in the field of Cryptocurrency in the United States, thanks to its open policies and regulatory framework. The state effectively reduces the operating costs of high-tech companies, including Cryptocurrency enterprises, through flexible property tax exemptions, R&D tax credits, and equipment investment incentives, providing substantial support for capital-intensive and energy-intensive Mining activities. In addition, laws such as the Digital Token Act simplify the Compliance process, provide Compliance guidance, and encourage innovative development. The regulatory system covers a wide range, ensuring the standardized operation of the encryption ecosystem from exchanges to Mining enterprises.

With the continuous expansion of the blockchain and cryptocurrency market, Colorado is expected to continue its innovative leadership. In the future, the state may attract more leading encryption companies from around the world by expanding tax incentives and optimizing the fintech sandbox program. At the same time, as energy usage and environmental requirements increase, Colorado may implement more green energy incentives in high-energy mining companies to balance industry growth with environmental responsibility. This will further consolidate its national leading position in the field of blockchain and encryption assets.