New FinCEN Virtual Currency BSA Requirements Present Compliance Implications
Tax & AccountingSeptember 16, 2022

Arizona virtual currency and non-fungible token airdrops and gas fees

By: CCH AnswerConnect Editorial

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A new Arizona law - House Bill 2204 - clarifies some income tax issues involving virtual currency and non-fungible tokens (NFTs). Specifically, Arizona:

  • Will not tax the value of virtual currency and NFTs received through airdrop 
  • Will allow taxpayers reporting gain or loss on the sale of virtual currency or an NFT to deduct gas fees paid on the purchase of the virtual currency or NFT

The new law takes effect January 01, 2023.

What is virtual currency?

“Virtual currency” is a digital representation of value (other than a representation of the U.S. dollar or a foreign currency) that functions as a medium of exchange, a unit of account, and a store of value.

What is an NFT?

An “NFT” is a non-fungible cryptographic asset recorded on a blockchain that possesses unique identifiers that distinguish it from other assets. NFTs can come in the form of digital artwork, videos, music, and more.

What is an airdrop?

An “airdrop” is a means of distributing virtual currency to the distributed ledger addresses of multiple taxpayers. Companies often distribute virtual currency for free by airdrop to encourage its widespread usage. 

How is Arizona treating airdrops?

Arizona will essentially consider these airdropped items as gifts, which will not be taxed as income at the time of receipt. Taxes will still apply to any gains when the items are later sold.

What are gas fees?

A “gas fee” is a transaction fee paid to the operator of a virtual network to facilitate the purchase, sale, or exchange of virtual currency or an NFT. 

How is Arizona treating gas fees?

Arizona will allow taxpayers to deduct gas fees if, in calculating gain or loss, they did not include the fees in the item’s cost basis.

What other state tax issues arise with virtual currency and NFTs?

Virtual currency and NFT transactions raise a variety of state income tax, sales and use tax, and unclaimed property issues. The states have only begun to address the various tax issues associated with virtual currency and NFTs. In adopting this law, Arizona has begun providing answers to taxpayers.

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