Crypto Currency in California: A Comprehensive Guide

California is a hub for cryptocurrency innovation, with many residents and businesses embracing digital currencies. The state has a growing number of cryptocurrency exchanges and trading platforms.

California has a relatively favorable regulatory environment for cryptocurrency, with the California Department of Financial Institutions (DFI) issuing guidelines for virtual currency businesses. This has helped to spur the growth of the cryptocurrency industry in the state.

One of the most popular cryptocurrencies in California is Bitcoin, which has been widely adopted by merchants and consumers alike. In fact, many businesses in California now accept Bitcoin as a form of payment.

California is taking a significant step in regulating digital financial assets with the Digital Financial Assets Law (DFAL). The law will take effect on July 1, 2025, and applies to any business activity involving digital financial assets in California.

Companies that currently serve California customers and engage in virtual currency services will need to obtain a license or restrict their California business by the effective date. This is because the DFAL defines regulated activities broadly and requires a license to engage in any digital financial asset business activity in California.

The DFAL includes exchanging, transferring, or storing digital financial assets, which means that companies that provide these services will need to comply with the law. Notably, the definition also includes exchanging in-game digital representations of value for a digital financial asset offered by or on behalf of the same game publisher.

An in-game digital representation of value is not considered a digital financial asset if it is issued by or on behalf of a publisher and used solely within a game platform provided by the same game publisher. This exemption is important for companies that develop and publish games.

The law also provides exemptions for banks, trust companies, and credit unions, as well as companies that solely provide connectivity software or computing power to securing a network that records digital financial asset transactions. Additionally, companies that provide data storage or security services for a business engaged in digital financial asset business activity are exempt, as long as they do not otherwise engage in digital financial asset business activity on behalf of another person.

People invest in cryptocurrencies for the same reason anyone invests in anything: they hope its value will rise, netting them a profit. If demand for a cryptocurrency grows, its value could increase.

Buying cryptocurrency isn't a taxable event by itself, but taxes are due when you sell, trade, or dispose of your cryptocurrency investments. You can choose to buy and hold cryptocurrency for as long as you'd like without paying taxes on it.

Taxes are due when you sell your cryptocurrency investments, and the gain or loss will depend on how long you've held the cryptocurrency. If you sell your cryptocurrency for a gain, you'll need to report this gain on your taxes.

Here's a breakdown of how taxes work on cryptocurrency investments:

People invest in cryptocurrencies for the same reason anyone invests in anything: they hope its value will rise, netting them a profit. This is based on the principles of supply and demand, where if demand for a cryptocurrency grows, its value could increase.

If demand for Bitcoin grows, for example, the interplay of supply and demand could push up its value. This is because people would be willing to pay more for it, making its price in dollars go up.

The same principles apply to Ethereum, where the more that is built on the Ethereum blockchain, the higher the demand for Ether could become.

Some people invest in cryptocurrencies because they see it as a promising foothold for communities that have been underserved by the traditional financial system. Pew Research Center data from 2021 found that Asian, Black and Hispanic people are more likely than White adults to say they have ever invested in, traded or used a cryptocurrency.

Investing in crypto can be a bit tricky, but it's not entirely different from investing in other assets. People invest in cryptocurrencies for the same reason they invest in anything: they hope its value will rise, netting them a profit.

If demand for a cryptocurrency like Bitcoin grows, its value could increase. For example, if people started using Bitcoin for huge-scale payments, demand for Bitcoin would go up, and its price in dollars would increase.

You can't predict the future, but understanding the basics can help you make informed decisions. The same principles apply to Ethereum, where the more that is built on the Ethereum blockchain, the higher the demand for Ether.

Some people believe cryptocurrency is a transformational technology, while others worry it's a fad. Whether or not you believe in its potential, it's essential to consider the pros and cons.

Buying or selling cryptocurrency as an investment can be a bit tricky when it comes to taxes. You can buy and hold cryptocurrency for as long as you'd like without paying taxes on it, even if the value increases.

However, taxes are due when you sell, trade, or dispose of your cryptocurrency investments in any way that causes you to recognize a gain in your taxable accounts. This includes selling or trading cryptocurrency in a taxable account.

If you buy $1,000 worth of Bitcoin and later sell it for $1,200, you'd need to report this $200 gain on your taxes. The gain will depend on how long you've held the cryptocurrency, whether it's a short-term or long-term capital gain.

A short-term capital gain is taxed as ordinary income, while a long-term capital gain is taxed at a lower rate. If you sell the same $1,000 worth of Bitcoin for $800, you'd recognize a loss that can offset other gains and up to $3,000 of your taxable income if your total losses are greater than your total gains.

Here's a quick breakdown of the tax implications:

If you receive cryptocurrency as payment for services, you'll need to report the fair market value of the cryptocurrency as ordinary income. For example, if you receive $200 worth of Litecoin in exchange for services, you'll need to report $200 of ordinary income on your tax return.

Cryptocurrencies are supported by a technology called blockchain, which keeps a tamper-resistant record of transactions and tracks who owns what.

Blockchain technology addressed a major problem in creating digital currencies: preventing people from copying their holdings and spending them twice.

Individual units of cryptocurrencies can be referred to as coins or tokens, depending on how they're used. Some are meant for exchange, others for storing value, and some for participating in specific software programs.

For most people, the easiest way to get cryptocurrency is to buy it from an exchange or another user.

Cryptocurrencies are supported by a technology called blockchain, which keeps track of who owns what and prevents people from making copies of their holdings and spending it twice.

Blockchain maintains a tamper-resistant record of transactions, making it a secure way to manage digital currencies.

Individual units of cryptocurrencies are referred to as coins or tokens, depending on how they are used, and some can be used to participate in specific software programs.

Some cryptocurrencies are intended to be units of exchange for goods and services, while others are stores of value.

Cryptocurrencies are created through a process called mining, which involves solving complex puzzles to verify transactions on the network. This process can be energy-intensive, but some cryptocurrencies have a lighter environmental impact.

Mining involves solving cryptographic hash functions to validate and add transactions to a blockchain. Miners receive cryptocurrency as a reward for this work.

If you earn cryptocurrency by mining it, it's considered taxable income and might be reported on Form 1099-NEC at the fair market value of the cryptocurrency on the day you received it. You need to report this income even if you don't receive a 1099 form.

You can also buy cryptocurrency from an exchange or another user, which is often the easiest way to get it.

If you exchange one type of cryptocurrency for another, it's considered a taxable transaction. You'll need to recognize a capital gain or loss, depending on the value of the cryptocurrency you're exchanging.

For example, let's say you have $1,000 worth of Litecoin and exchange it for $1,000 worth of Ethereum. You'll have to pay a $700 capital gain if you originally paid $300 for the Litecoin.

The new cost basis for your Ethereum is its fair market value at the time of exchange, which is $1,000. You'll need to reference all of these transactions back to US dollars for your tax return, even if you exchange one cryptocurrency for another without converting to US dollars first.

In California, sales and use tax is only applicable to transactions involving the sale or use of tangible personal property. Since crypto transactions do not involve the transfer of tangible personal property, they are not considered a "sale" under California law.

The base state sales tax rate in California is 7.25%, but with local taxes included, the total sales tax can be as high as 10.25% in some areas.

If you sell crypto for more than what you paid to acquire it, there is a tax on the profit from the sale, known as capital gains tax. In California, there is no separate or lower rate for capital gains tax like there is at the federal level.

You'll face capital gains or losses if you buy, sell, or exchange crypto in a non-retirement account. If you owned the cryptocurrency for one year or less before spending or selling it, any profits are typically short-term capital gains, which are taxed at your ordinary income rate.

Here's a breakdown of how the IRS treats short-term and long-term capital gains:

To calculate your gain or loss, you need to determine your cost basis, which is the price you paid, adjusted by any fees or commissions you paid to engage in the transaction. You'll also need to determine the sale amount and adjust it by any fees or commissions you paid to close the transaction.

You can use a Crypto Tax Calculator to get an idea of how much tax you might owe from your capital gains or losses from crypto activities.

Taxes are due when you sell, trade, or dispose of your cryptocurrency investments in any way that causes you to recognize a gain in your taxable accounts. This doesn't apply if you trade cryptocurrency in a tax-deferred or tax-free account like an IRA.

If you receive cryptocurrency as payment for goods or services, the payment counts as taxable income, just as if they'd paid you via cash, check, credit card, or digital wallet. For tax reporting, the dollar value that you receive for goods or services is equal to the fair market value of the cryptocurrency on the day and time you received it.

You need to keep track of your crypto activity and report this information to the IRS on the appropriate crypto tax forms. The IRS estimates that only a fraction of people buying, selling, and trading cryptocurrencies were properly reporting those transactions on their tax returns.

Here's a list of the key tax forms related to cryptocurrency:

Crypto tax software can help you track all of these transactions, ensuring you have a complete list of activities to report when it comes time to prepare your taxes.