Assigned to FIN AS PASSED BY COW
ARIZONA STATE SENATE
Fifty-Fifth Legislature, Second Regular Session
AMENDED
FACT SHEET FOR H.B. 2204
technical correction; wage board; powers
(NOW: taxation; subtraction; virtual currency)
(NOW: taxation; virtual currency; non-fungible tokens)
Purpose
Effective January 1, 2023, allows a taxpayer to deduct, in addition to the federal itemized
deduction for personal casualty losses, the amount of personal casualty losses related to virtual
currency and non-fungible tokens (NFTs). Prescribes the treatment of virtual currency and NFT
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 (IRC) 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 for H.B. 2204, as introduced, 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 addition to the federal itemized deduction for personal casualty
losses, the amount of personal casualty losses related to virtual currency and NFTs to the extent
they are not deducted under section 165 of the U.S. IRC. FACT SHEET – Amended
H.B. 2204
Page 2
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 or an NFT 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 NFT 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 NFT as a non-fungible cryptographic asset on a blockchain that possesses unique
identifiers or other metadata that distinguishes the asset from another token or asset in a manner
that makes the asset irreplaceable and non-exchangeable for a similar token or asset.
7. Defines gas fee as a fee paid to the operator of a virtual network for the use of the network to
facilitate the purchase, sale or exchange of virtual currency or an NFT.
8. Defines airdrop as the receipt of virtual currency through a means of distribution of virtual
currency to the distributed ledger addresses of multiple taxpayers.
9. Defines foreign currency.
10. Makes conforming changes.
11. Becomes effective on January 1, 2023.
Amendments Adopted by Committee of the Whole
1. Limits the income tax deduction for personal casualty losses allowed by the U.S. IRC to losses
related to virtual currency and NFTs.
2. Allows a taxpayer to deduct the amount of personal casualty losses related to virtual currency
and NFTs in addition to, rather than in lieu of, the federally itemized deduction for personal
casualty losses allowed by the U.S. IRC.
3. Allows a taxpayer who included a gain or loss on the sale of an NFT in their Arizona gross
income to subtract gas fees from the taxpayer's Arizona gross income, as outlined.
4. Defines NFT as a non-fungible cryptographic asset on a blockchain that possesses unique
identifiers or other metadata that distinguishes the asset from another token or asset in a manner
that makes the asset irreplaceable and non-exchangeable for a similar token or asset. FACT SHEET – Amended
H.B. 2204
Page 3
5. Includes, in the definition of gas fee, the fee paid to the operator of a virtual network for the
use of the network to facilitate the exchange of virtual currency or NFTs and the purchase or
sale of NFTs.
6. Makes technical and conforming changes.
House Action Senate Action
COM 2/15/22 DPA/SE 9-1-0-0 FIN 3/9/22 DP 6-3-1
3
rd
Read 2/23/22 52-7-1
Prepared by Senate Research
June 7, 2022
MG/slp