1. Introduction to Texas
The State of Texas, often referred to simply as Texas, is the second-largest state in both land area and population in the United States (covering approximately 690,000 square kilometers, second only to Alaska, with a population of around 30 million, second only to California). It is located in the south-central region of the U.S. and is known as the “Lone Star State” because it was once an independent republic.
(Custom image based on data from Wikipedia on U.S. GDP and population)
In 2022, Texas had an economic output of $2.4 trillion, accounting for 9.4% of the U.S. GDP. Its major industries include energy, agriculture, high-tech manufacturing, and financial services. Texas is rich in natural resources, with oil and natural gas being its primary minerals. The state’s known oil reserves exceed 8 billion barrels, representing about one-third of the known U.S. supply. Many large international oil companies have their headquarters in Texa.
Texas is also a key hub for developing computer components, systems, and software in the U.S. Austin, Dallas, and Houston are the state’s major centers for this industry, with Austin often referred to as “Silicon Hills.” The average electricity price in Texas is approximately 10.50 cents per kilowatt-hour, and the state accounts for 25.5% of national power production, making it a land of freedom for electricity usage.
(Custom image based on data from EIA on electricity price and share)
2. Texas’s Basic Tax System
When investors consider where to establish a business in the U.S., they typically assess the investment environment, market size, and operating costs. In January of this year, the Wall Street released a report on the best and worst states for startups in 2023, ranking all 50 U.S. states based on key entrepreneurial metrics, including access to funding, affordability, and tax rates. The results showed that Texas ranked as the third-best state for startups, thanks to its strong job market, business-friendly regulatory policies, and relatively low state taxes.
The Texas government advocates for a low-tax, minimally interventionist regulatory model. A survey on small business friendliness across U.S. states revealed that Texas earned an A grade in terms of business accessibility, labor talent hiring, and taxes, thanks to its favorable environment for entrepreneurship, employment, and taxation.
While Texas is famous for its low taxes, the reality is more complex. Texas does not impose a state income tax (though federal income tax still applies to all residents), but to offset this, the state relies more heavily on other forms of taxes, such as sales and property taxes. A 2020 report by Ernst & Young indicated that the total state and local taxes paid by individuals in Texas amounted to 3.5% of their income, well below the national average of 5.8%. However, Texas imposes an effective business tax rate of 5.6% relative to its economic output, higher than the national average of 4.7%, ranking 11th among U.S. states.
(Image source: TTARA Team Research Report June 20)
2.1 Types of Taxes and Tax Rates
According to official sources, Texas currently has 29 different types of taxes, including sales tax, franchise tax, and property tax.
Sales and Use Tax: Texas levies a 6.25% state sales and use tax on most goods and taxable services, including retail sales, rentals, and leases. Local jurisdictions (cities, counties, special-purpose districts, and transit authorities) can impose up to an additional 2% sales and use tax, bringing the maximum combined tax rate to 8.25%. Sales tax applies to most goods and services, although certain grocery items (such as flour, sugar, milk, and eggs) and prescription drugs are exempt. Texas also imposes sales tax on digital goods, including online subscription services.
Property Tax: Texas does not have a state-level property tax; property taxes are collected by local governments. Rates vary across regions, ranging from 1.5% to 3%, with an average rate of 1.65%. Property taxes in Texas primarily apply to real estate, including residential and commercial properties and land owned by individuals and businesses.
Franchise Tax: Every taxable entity that is either formed in Texas or does business in Texas must file and pay franchise taxes. These entities include corporations, limited liability companies (LLCs), banks, state banks, savings and loan associations, partnerships, and more. Sole proprietorships (except for single-member LLCs) and general partnerships are not required to file or pay franchise taxes. The tax rate is 0.375% for retail and wholesale businesses and 0.75% for other industries.
Vehicle Fuel Tax: Diesel and gasoline are taxed at 20 cents per gallon, and liquefied natural gas is taxed at 15 cents per gallon.
Additionally, Texas imposes other taxes such as hotel occupancy tax and tobacco tax.
(Table created based on Texas tax details)
2.2 Taxpayers
Under Texas’s tax system, taxpayers include individuals, businesses, and other legal entities, with tax obligations manifesting in various ways.
Individuals are not required to pay state-level individual income taxes, but they do pay sales taxes, with the state tax rate set at 6.25%. Local governments can add up to 2% in additional taxes, resulting in a total sales tax rate of up to 8.25% in some areas. Additionally, individuals who own real estate (such as homes or land) must pay property taxes levied by local governments. In 2023, the average property tax rate in Texas was approximately 1.63%. Revenue from property taxes is primarily used to fund local public services, such as education and infrastructure development.
For businesses, Texas does not impose a traditional corporate income tax, but all companies operating in Texas must pay a franchise tax. This tax is based on a business’s total revenue or profit, with rates varying by industry. Retail and wholesale businesses pay a rate of 0.375%, while other industries pay 0.75%. Even tax-exempt businesses are required to file an annual tax return. Additionally, businesses must collect and remit sales taxes on taxable goods and services sold, which applies to most goods and some digital products, such as software and media subscriptions.
2.3 Taxable Objects
Taxable objects refer to the specific activities, properties, or transactions that are subject to taxation under the law, forming the basis of government tax revenue. In Texas, a wide range of activities, properties, and transactions are taxable, including goods, services, real estate, business revenue, and specific consumer products.
2.4 Major Tax Incentives and Policies
For 20 consecutive years, Texas has been ranked as the “Best State for Business” by CEOs of various companies, due in part to its unique economic incentive policies and tax relief benefits.
Texas does not levy corporate income tax or individual income tax, making it one of the states with the lowest tax burdens in the U.S. The state offers numerous tax incentives for businesses, including sales tax exemptions for manufacturing machinery, R&D materials, software, and equipment, as well as franchise tax exemptions for solar equipment manufacturers, sellers, or installers. Additional incentives include property tax reductions, fee waivers, local cash grants, and local funding to assist businesses in relocating or expanding within the state. The Texas Enterprise Zone Program (EZP) is a state sales and use tax refund program aimed at encouraging private investment and job creation in economically distressed areas of the state.
Texas’s economic development incentives are extensive and diverse, designed to keep business growth strong across multiple industries. For example, the Texas Enterprise Fund (TEF), one of the largest “deal-closing” funds of its kind in the U.S., is a performance-based incentive. The state also offers additional rewards for major events, university research programs, job creation, new product development, skills training, and educational support for relocating employees and their families. These incentives aim to reward companies that contribute substantial capital investment and employment opportunities to the Texas economy.
Companies relocating or expanding in Texas may qualify for asset-backed loans, leveraged loans, or tax-exempt bonds, including the Texas Industrial Revenue Bond Program and the Texas Military Value Revolving Loan Fund. Various grants are also available to Texas communities, certain higher education institutions, and businesses.
In recent years, Texas has attracted a large number of cryptocurrency-related companies and projects. Major cryptocurrency mining companies like Riot Blockchain and Argo Blockchain have set up mining facilities in Texas, and blockchain technology companies like Blockcap have relocated their headquarters to Austin. Why has Texas become so appealing to cryptocurrency companies? Next, we will provide a more detailed analysis from the perspectives of tax and regulation.
3. Texas’s Cryptocurrency Tax System
The legal status and regulation of cryptocurrency assets in Texas have undergone several phases of change, with new issues and viewpoints emerging regularly. As of now, Texas does not have specific laws governing the taxation of cryptocurrency assets. Taxes on cryptocurrency are mainly based on the existing tax system, treating these assets according to their properties. Depending on the usage and context, different tax rates may apply. This allows cryptocurrency assets to benefit from Texas’s unique tax advantages.
(Custom image based on the evolution of Texas cryptocurrency legislation)
3.1 Definition and Classification of Crypto Assets
The legal definition of cryptocurrency in Texas was primarily established through the passing of H.B. 4474 in 2021. This bill clarified the legal status of cryptocurrencies, defining them as “a representation of value based on electronic form, intended to serve as a medium of exchange, a unit of account, or a store of value.” The bill amended the Texas Uniform Commercial Code (UCC), recognizing cryptocurrency as a digital asset akin to other financial assets. This definition ensures that cryptocurrencies can be used in legitimate business transactions, providing legal protection and a regulatory framework.
Additionally, H.B. 4474 introduced the concept of “control” over cryptocurrencies, granting holders exclusive rights over their cryptocurrency, including usage, transfer, and retention rights. This framework lays the foundation for the legal application of cryptocurrency in business and finance, offering legal protection to both businesses and individuals involved in crypto transactions.
3.2 Taxes on Crypto Assets in Texas
The IRS classifies cryptocurrencies and other “virtual currencies” as property. Any cryptocurrency received must be reported as “income,” and capital gains taxes are owed when it is sold at a profit. While Texas residents still have to pay federal taxes, they benefit from exemptions on state-level income taxes. However, other taxes, such as sales tax and property tax, still apply to cryptocurrencies. For instance, if a cryptocurrency is sold in Texas for more than its acquisition cost, capital gains tax (a federal tax) must be paid. If there are capital losses, federal regulations allow these losses to offset gains. Texas does not impose an estate tax on inherited cryptocurrency, though significant estates may still be subject to federal estate taxes.
Sales tax is applied to goods and services purchased with cryptocurrency. The rate depends on the items or services being purchased, rather than the use of cryptocurrency itself. Property purchased with cryptocurrency is also taxable. Although there is no state property tax in Texas, properties are still subject to county and municipal taxes.
Texas does not have a state corporate income tax, meaning businesses are not required to pay state income taxes on their cryptocurrency profits, making it particularly attractive to crypto companies and miners. However, Texas implements a margin tax, which is based on total revenue rather than traditional net profit. Any business with annual revenue exceeding approximately $1.2 million may need to pay the margin tax, with rates ranging from 0.375% to 0.75%, depending on the type and size of the business. This could create some tax pressure for cryptocurrency companies, especially miners with high revenue but low profits.
Crypto miners need to pay attention to property taxes in Texas. Mining typically requires significant investment in mining machines and electrical infrastructure, which are classified as “tangible personal property” and subject to local property taxes. Texas’s property tax rates range from 1.8% to 2.3%, depending on the county or city. Thus, investing in mining hardware needs to account for these tax costs. Mining activities are also considered income generation at the federal level, so miners must report the market value of mined cryptocurrency as income on their federal tax returns. Even though Texas doesn’t levy state income tax, miners must pay federal income tax on their mining earnings. When miners sell their cryptocurrency for profit, they are subject to federal capital gains tax on the increase in value.
For businesses engaged in cryptocurrency transactions or related services, sales tax is another important factor. While cryptocurrency transactions themselves are not subject to sales tax (since virtual currencies are considered intangible assets), the sale of hardware or services related to crypto operations may trigger sales tax liabilities. For example, businesses that sell mining equipment or offer hosting services for mining machines are required to collect sales tax on those products and services, with the base tax rate at 6.25%, and the maximum rate, including local taxes, up to 8.25%.
Federal tax compliance is also crucial. While Texas has a relatively relaxed tax system, federal tax laws require accurate reporting of income, capital gains, and losses. The IRS demands strict reporting of cryptocurrency transactions, mining income, and any sale of crypto assets. This means that miners must consider not only the costs of electricity and hardware but also how to correctly estimate the market value of their mined cryptocurrency and properly report it on their federal tax forms.
3.3 Tax Incentives for Cryptocurrencies
Currently, there are no specific tax exemptions or incentives in Texas directly targeting cryptocurrency transactions, investments, or mining activities. Most of the state’s tax incentive policies focus on traditional industries and sectors such as renewable energy and manufacturing. However, there are some strategies for obtaining tax benefits related to cryptocurrency under existing regulations:
- Holding assets for over a year before selling: Long-term capital gains are taxed at 25%, whereas short-term capital gains are taxed at 32%.
- Tax loss harvesting: Selling at a loss allows taxpayers to realize the loss and use it to offset other capital gains or up to $3,000 of ordinary income per year. Losses can also be carried forward to future years.
- Selling in low-income years: Lower income can translate into lower tax rates.
Cryptocurrency miners and related businesses may also benefit from some existing tax incentives and policies in Texas, even though they are not specifically designed for the crypto industry. These opportunities include:
- Building large data centers or mining facilities: Crypto miners often need to construct or expand large-scale data centers to support their mining operations. Under Chapter 312 of the Texas Local Government Code, businesses can enter agreements with local governments to receive property tax abatements for up to 10 years. This policy applies to capital-intensive facilities such as newly constructed or expanded data centers, helping businesses reduce long-term operating costs.
- High energy consumption for mining activities: Cryptocurrency mining is an energy-intensive process. Texas’s electricity policies offer flexible pricing options for such high-energy industries. The Electric Reliability Council of Texas (ERCOT) allows miners to negotiate long-term contracts with electricity providers for discounted rates. Additionally, miners who choose renewable energy sources such as solar or wind can benefit from further energy incentives.
- R&D of new mining technologies or blockchain applications: Companies investing in research and development of mining technologies or blockchain applications can take advantage of Texas and federal R&D tax credits. These credits allow companies to offset their tax liabilities by the amount spent on R&D activities, reducing their overall tax burden.
- Purchasing or leasing commercial property for mining: Crypto miners often need to buy or lease large industrial properties or warehouses for mining facilities. Texas offers property tax abatements under Chapter 312 of the Texas Local Government Code, where companies can negotiate with local governments for property tax reductions, especially when the investment is used for expanding commercial purposes. Additionally, businesses can take advantage of the Freeport Tax Exemption to avoid paying property taxes on inventory equipment imported and stored for mining activities.
4. Texas’s Regulatory Framework for Crypto Assets
As laws evolve and public interest grows, Texas is continuously refining its legal framework for crypto assets. However, similar to its tax system, the state does not yet have a comprehensive regulatory system specifically focused on crypto assets. While the existing regulatory framework covers some aspects of crypto assets, gaps remain. Despite this, Texas is at the forefront of cryptocurrency regulation in the U.S., thanks to its innovative approaches.
4.1 Regulatory Bodies
Although Texas is gradually enacting laws and regulations to strengthen oversight of crypto assets, the overall regulatory framework is still incomplete. Currently, several agencies are involved in crypto regulation, including the Texas State Securities Board (TSSB), the Texas Department of Banking (TDB), and the Blockchain Work Group. These entities perform different roles, but there is no unified regulatory system in place.
TSSB is responsible for regulating securities-related activities involving crypto assets. If a cryptocurrency or token issuance has the characteristics of a security, TSSB ensures that the issuance and trading comply with Texas Securities Act regulations, preventing fraud and illegal fundraising. Its focus is primarily on the investment side of cryptocurrencies and token offerings that resemble securities.
TDB supervises cryptocurrency custody services. Texas allows state-chartered banks to offer cryptocurrency custody services to customers, and TDB ensures that these banks adopt strict risk management practices to safeguard client assets. TDB also oversees the financial management of cryptocurrency platforms. Under the H.B. 1666 bill, TDB requires digital asset service providers to demonstrate sufficient reserve funds to prevent the commingling of client funds with operational funds.
Blockchain Work Group was established by H.B. 1576 with the aim of promoting the development and application of blockchain technology, especially in fields like financial services and supply chain management. The group provides policy recommendations to the state government but does not directly regulate cryptocurrency; instead, its focus is more on technological and industrial development.
While the current laws do not fully cover all aspects of the cryptocurrency industry, particularly in decentralized finance, mining, and cryptocurrency payments, the regulatory framework is steadily advancing. Texas is expected to fill these gaps through continuous legislation and policy innovation, creating a more stable and secure environment for the cryptocurrency industry.
(Custom image based on Texas’s cryptocurrency regulatory framework)
4.2 Regulatory Targets
Though Texas’s regulatory framework for the crypto industry remains somewhat fragmented, it leads the nation in many aspects. The primary targets of regulation include cryptocurrency exchanges and mining companies.
Cryptocurrency Exchanges face comprehensive regulations, covering reserve management, client fund transparency, transaction compliance, security, and user protection. With the passage of H.B. 1666, Texas requires exchanges to submit regular reserve audit reports to ensure that client assets are segregated from platform operating funds. This measure prevents the misuse of client funds and enhances user fund protection, similar to the reserve requirements of traditional banks, ensuring that digital assets are available for withdrawal at any time.
Exchanges must also comply with federal and state anti-money laundering (AML) and Know Your Customer (KYC) regulations, especially in cross-border transactions, to prevent illicit fund transfers and money laundering. Large exchanges like Coinbase have already implemented high-level identity verification systems and anti-fraud tools to ensure that users trade within legal frameworks.
Additionally, exchanges must ensure that their operations do not violate U.S. securities laws. The TSSB rigorously reviews Initial Coin Offerings (ICOs) and cryptocurrency projects with security-like features. In 2018, Texas shut down several unregistered token offerings for failing to disclose sufficient information to investors and posing fraud risks. Texas’s regulation of ICOs protects investors and establishes strict requirements for the compliant issuance of digital assets by exchanges.
Cryptocurrency Mining Companies face dispersed regulations, including energy use, environmental responsibilities, and more.
In 2018, the Texas Securities Board terminated an Australian mining company accused of selling unregistered securities, a case that involved fraud and misleading claims.
Texas’s low electricity rates and flexible power market have attracted numerous mining companies, making Texas one of the largest Bitcoin mining hubs globally, especially with its support for renewable energy policies. Power usage regulation is a key issue for mining companies, as crypto mining consumes substantial amounts of electricity. Texas has strict monitoring of energy usage for high-consumption businesses, requiring mining companies to scale operations based on grid fluctuations and curtail mining during peak demand to support grid stability. In February 2021, a severe winter storm caused Texas’s power grid to collapse, and several mining companies voluntarily reduced electricity usage to ensure power for homes and critical services like hospitals. The Electric Reliability Council of Texas (ERCOT) manages electricity dispatch for energy-intensive industries like crypto mining.
Texas also regulates mining companies’ compliance with environmental regulations. Large-scale mining operations, especially those using traditional energy sources, can impact the environment. As a result, the Texas government actively encourages miners to shift toward renewable energy, offering tax incentives and policy support to promote the use of wind and solar power.
Other crypto-related intermediary services are also subject to regulation.
Cryptocurrency Wallet Providers, Investment Funds, and Cryptocurrency ATM Operators must ensure the security of stored crypto assets, protect against hacking, and comply with KYC and AML regulations. Cryptocurrency investment funds and institutions must comply with securities laws, particularly when dealing with tokenized assets or DeFi investments. The TSSB ensures that investors receive full disclosure. Cryptocurrency ATM operators must adhere to AML and KYC regulations to prevent illegal money laundering activities via ATMs.
5. Summary and Outlook
Considering state-level policies, the market environment, and operational capacity, more and more crypto companies (not limited to mining enterprises) are establishing themselves in Texas. The state boasts abundant economic and natural resources, a unique tax environment, and a leading regulatory framework. With its rich energy resources, high electricity production, and low electricity costs, Texas provides favorable conditions for cryptocurrency mining. Additionally, the absence of a state income tax increases the profitability of businesses.
Texas leads the nation in crypto legislation and regulation, balancing asset security with innovation opportunities. Looking ahead, as cryptocurrency and blockchain technology continue to evolve, Texas is likely to strengthen its global leadership in the crypto space by enacting more innovative regulations, promoting the industry’s standardization and development.
