The Arizona House and Senate approved HB 2204 and sent it to the governor on June 29. This bill adds new reductions to Arizona gross income for the value of virtual currency and non-fungible tokens (NFTs) received from an airdrop. Apparently though any future appreciation would not be subtracted from gross income. While not clear, I assume these tax-free airdrops will have zero basis for Arizona and a gain when disposed of.

In addition, gas fees not already added to the taxpayer’s basis in virtual currency or NFT is also a subtraction from gross income. I’m not clear what this means for basis.

HB 2204 includes definitions for gas fee, NFT and virtual currency. The virtual currency one matches the IRS definition in Rev. Rul. 2019-24 on hard forks – “s a digital representation of value that functions as a medium of exchange, a unit of account, and a store of value other than a representation of the United States dollar or a foreign currency.”

These changes, if enacted, would be effective after 12/31/22.

What is the purpose? I assume it is to encourage Arizonians to own virtual currency and hope for an airdrop of virtual currency or an NFT. It seems like an unusual way to encourage ownership of virtual currency particularly given that airdrops are not that common.

While IRS Rev. Rul. 2019-24 deals specifically with hard forks, it refers to hard forks following an airdrop. I think the IRS view of the tax treatment of receiving an airdrop is that once it is available for the taxpayer to access, even if the taxpayer doesn’t want to access it, it is included in income at its FMV when received.

So, HB 2204 will create federal-Arizona differences in basis and gross income for owners to track.

If the lawmakers really want to encourage ownership of virtual currency, why don’t they:

1) Add a de minimis rule to exclude gains.

2) Give all Arizonians some virtual currency. Or perhaps something like Miami did with MiamiCoin (4/21/22 FastCompany article and Citicoins info).

3) Give a tax break to miners and stakers residing in Arizona.

What do you think?