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corporation whose stock is held by law. It does not appear that any state
the trust. has decoupled from or modified these
How taxpayers federal tax principles, and at least one
Ensuring compliance to treat the sale, use, state, Wisconsin, has expressly adopted
preserve S election or exchange of them. Specifically, in Tax Bulletin No.
Wholly owned grantor trusts, non- 213 (April 2021), Wisconsin informed
grantor administrative trusts, testamen- cryptoassets depends individual and business taxpayers that
on whether the
tary trusts, voting trusts, ESBTs, and the state follows the federal treatment of
QSSTs qualify as eligible shareholders transaction is properly cryptoasset transactions and also clari-
of S corporation stock. If these trusts fied that taxpayers must treat cryptoasset
classified as business
fail to comply with the respective transactions similar to transactions
Code provisions and regulations, the S or nonbusiness involving other types of intangible prop-
corporation election for the underly- erty. Illinois also expressly classifies
ing entity will terminate unless relief income. cryptoassets (specifically referring to
is pursued under Sec. 1362(f) for an Bitcoin, a type of cryptoasset) as intan-
inadvertent termination. Therefore, the gible personal property for state tax pur-
individuals responsible for the afore- cryptoassets to fiat currency for the pur- poses (IT21-0004-GIL (August 2021)).
mentioned trusts should monitor trust pose of making domestic and foreign tax
status to ensure compliance, thereby payments (e.g., sales and use tax, value Business income vs.
preserving the S election for the under- added tax), and income classification nonbusiness income
lying corporation. and revenue-sourcing issues related to classification
From Christopher Hartman, CPA, buying and selling cryptoassets through How taxpayers treat the sale, use, or
J.D., Columbus, Ohio, and Katherine A. virtual currency exchanges. exchange of cryptoassets depends on
Walter, CPA, J.D., LL.M., Seattle This discussion examines how state whether the transaction is properly clas-
corporate income taxation applies to sified as business or nonbusiness income.
virtual currency exchange transactions. What constitutes business income varies
State & Local Taxes The specific focus is income classifica- slightly by state, but a significant num-
tion and revenue-sourcing issues, with ber of states apply the Multistate Tax
Cryptoasset transactions: California law used to illustrate how Compact definition, which provides that
State corporate income tax states may address such issues. business income is income “arising from
implications transactions and activity in the regular

Many businesses that once considered Cryptoassets as ‘property’ for course of the taxpayer’s trade or business
cryptoassets a highly speculative in- tax purposes and includes income from tangible and
vestment have been won over by the The IRS has indicated that taxpayers intangible property if the acquisition,
secure, real-time, peer-to-peer nature must treat cryptoassets (which it gener- management, and disposition of the
of cryptoasset transactions and now use ally refers to as virtual currency) as prop- property constitute integral parts of the
cryptoassets as a part of their overall erty and that the general tax principles taxpayer’s regular trade or business op-
strategy to fund operations and to en- applicable to property transactions also erations” (Art. IV, Para. 1(a)).
gage in day-to-day business transactions apply to cryptoasset transactions (Notice Under this definition, the sale, use,
with customers. 2014-21). Accordingly, corporate tax- or exchange of cryptoassets is properly
Such businesses will need to keep a payers that use cryptoassets must apply classified as business income if a tax-
watchful eye on the state tax, as well as these principles when calculating their payer acquires, maintains, and disposes
federal tax, implications of such transac- taxable income for federal tax purposes. of the cryptoasset as an integral part
tions. For example, businesses will need Because federal taxable income is of its regular trade or business opera-
to consider timing and valuation issues generally the starting point for calculat- tions. Nonbusiness income is generally
related to income and/or gain recogni- ing taxable income for state corporate defined as all income that is not business
tion, sourcing issues related to mined income tax purposes, the federal tax income. Understanding income clas-
cryptoassets, recordkeeping issues related principles that apply to cryptoasset sification is critical to proper compli-
to acceptance/utilization of cryptoassets transactions are baked into taxable ance, as business income is subject to
in the regular course of business, issues income for state tax purposes, unless apportionment among multiple states
related to the periodic conversion of such principles are modified under state whereas nonbusiness income is generally

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