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ARIZONA STATE SENATE
Fifty-Fifth Legislature, Second Regular Session
REVISED
technical correction; wage board; powers
(NOW: taxation; subtraction; virtual currency)
Purpose
Effective January 1, 2023, allows a taxpayer to deduct, in lieu of the standard deduction and the federal itemized deduction for personal casualty losses, the amount of personal casualty losses without consideration of the prescribed limitations and the amount of personal casualty losses related to virtual currency and nonfungible tokens (NFTs). Prescribes the treatment of virtual currency gains and losses.
Background
Individual income tax is levied on Arizona residents’ taxable income and uses a graduated rate structure, based on the taxpayer’s income level. The tax base begins with Arizona gross income, which is equivalent to the taxpayer's federal adjusted gross income (AGI). Statute authorizes various amounts to be added or subtracted when computing an individual's Arizona AGI, which is further reduced by standard or itemized deductions to arrive at Arizona taxable income (A.R.S. §§ 43-1021 – 43-1023; and 43-1042).
The U.S. Internal Revenue Code allows a deduction for any loss sustained
during the taxable year that is not compensated for by insurance or otherwise.
The deduction is limited to:
1) losses incurred in a trade or business; 2) losses incurred in any
transaction entered into for profit not connected with a trade or business; and
3) losses of property not connected with a trade or business or a transaction
entered into for profit, if the losses arise from theft or from fire, storm,
shipwreck or other casualty. For TYs 2018 through 2025, an individual's
personal casualty loss must be allowed as a deduction only to the extent that
it is attributable to a federally declared disaster (26
U.S.C. § 165).
The Joint Legislative Budget Committee fiscal note estimates that removing the requirement for a casualty loss to be limited to a federally declared disaster would result in a reduction of individual income tax revenue of at least $500,000 annually. For the cryptocurrency provisions, the fiscal impact appears to be minimal in some circumstances and would likely represent foregone potential revenue in other cases (JLBC fiscal note).
Provisions
1. Allows a taxpayer to deduct, in lieu of the standard deduction and the federal itemized deduction for personal casualty losses, the:
a) amount of personal casualty losses allowed by the U.S. IRC without consideration of the prescribed limitations; and
b) amount of personal casualty losses related to virtual currency and NFTs to the extent they are not already deducted.
2. Establishes an individual income tax subtraction, to the extent not already excluded from Arizona gross income under the U.S. IRC, for the value of virtual currency and NFTs the taxpayer received through an airdrop, at the time of the airdrop.
3. Allows a taxpayer who included a gain or loss on the sale of virtual currency in their Arizona gross income to subtract gas fees from the taxpayer's Arizona gross income, if in calculating the gain or loss the taxpayer did not include any gas fees paid on the purchase of the virtual currency or did not otherwise deduct the gas fees in determining their Arizona gross income.
4. Precludes the virtual currency and NFT subtraction from being interpreted as providing a subtraction for any appreciation in value that occurs from holding the currency after the initial receipt of the airdrop.
5. Defines virtual currency as 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 U.S. dollar or a foreign currency.
6. Defines gas fee as a fee paid to the operator of a virtual network for the use of the network to facilitate the purchase or sale of virtual currency.
7. Defines airdrop as the receipt of virtual currency through a means of distribution of virtual currency to the distributed ledger addresses of multiple taxpayers.
8. Defines foreign currency.
9. Makes conforming changes.
10. Becomes effective on January 1, 2023.
Revisions
· Updates the fiscal impact statement.
House Action
COM 2/15/22 DPA/SE 9-1-0-0
3rd Read 2/23/22 52-7-1
Prepared by Senate Research
March 17, 2022
MG/slp