California Crypto Tax Services

California Crypto Tax: Key Facts

California's progressive tax system creates significant tax burdens for crypto investors. Here are the essential facts:

• State Tax Rates: 1% to 13.3% on all income including crypto gains

• Mental Health Services Tax: Additional 1% on income over $1 million

• No Long-Term Preference: All capital gains taxed as ordinary income

• Combined Maximum Rate: Over 54% on short-term gains (federal + state + NIIT)

• DFAL Licensing: Businesses need license by July 1, 2026 (extended from July 2025)

• No State Crypto Guidance: FTB has not issued specific crypto tax guidance; follows federal treatment

 

The Golden State's Progressive Income Tax System

California's tax rates are the highest in the nation for crypto investors. Unlike the federal system, California offers no preferential rate for long-term capital gains—whether you held for one day or ten years, the same rates apply.

Combined Maximum Rates

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At Monaco CPA, we provide remote crypto tax services to California residents throughout the state. From Silicon Valley founders with token compensation to Los Angeles NFT creators to San Diego DeFi traders, we help California's diverse crypto community navigate the state's demanding tax environment.

 

2025 Regulatory Changes Affecting California Crypto Investors

Federal regulatory changes add new compliance requirements on top of California's already complex tax system.

Wallet-by-Wallet Cost Basis Tracking (Effective January 1, 2025)

Revenue Procedure 2024-28 requires calculating gains and losses separately for each wallet or account. FIFO is the default method. Notice 2025-7 provides temporary relief through 2025 for specific identification methods. California conforms to federal cost basis rules.

 

Form 1099-DA Implementation

Custodial brokers report gross proceeds to the IRS for 2025 transactions. California's Franchise Tax Board (FTB) receives federal data through information sharing agreements. Discrepancies will trigger notices from both authorities.

 

DeFi Broker Rule Repealed

Public Law No. 119-5 (April 2025) means decentralized platforms won't report activity. California still expects full reporting of all gains—and the FTB is increasingly sophisticated in identifying unreported income through data matching and residency audits.

 

California State Crypto and Capital Gains Tax Rules

California conforms to federal treatment of cryptocurrency as property. However, the state's progressive rate structure creates unique challenges.

California Income Tax Rates (2025)

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No Long-Term Capital Gains Preference

California does not offer preferential rates for long-term capital gains. All gains are taxed as ordinary income regardless of holding period. This contrasts sharply with federal treatment, where long-term rates (0%, 15%, 20%) are significantly lower than short-term rates (up to 37%).

 

Capital Loss Treatment

California follows federal capital loss rules:

• Losses offset gains dollar-for-dollar

• Net losses deductible against ordinary income up to $3,000 per year

• Unused losses carry forward indefinitely

• No wash sale rules for cryptocurrency

 

Digital Financial Assets Law (DFAL)

California enacted the Digital Financial Assets Law requiring licensing for crypto businesses operating in the state. This primarily affects businesses, not individual investors.

DFAL Key Facts

• Licensing Deadline: July 1, 2026 (extended from July 2025 via AB 1934)

• Who Needs License: Exchanges, custodians, stablecoin issuers, kiosk operators

• Small Business Exemption: $50,000 exemption threshold

• Kiosk Limits: $1,000 daily transaction limit and 15% fee cap (effective January 2025)

• Stablecoin Requirements: DFPI Commissioner approval with 1:1 reserve requirements

• First Enforcement: June 2025 action against Coinme ($300,000 penalty)

 

Impact on Individual Investors

DFAL licensing requirements do not affect individual crypto investors. However, the law may limit which platforms can operate in California, potentially affecting access to certain exchanges or services.

 

Taxable Crypto Events

Understanding which events trigger California tax is essential for compliance and planning.

Taxable Events

• Selling crypto for USD or other fiat currency

• Trading one cryptocurrency for another

• Using crypto to purchase goods or services

• Receiving crypto as payment (ordinary income at FMV)

• Mining rewards when received

• Staking rewards when you have dominion and control

• Airdrops when received

• Hard forks when you have dominion and control over new tokens

 

Airdrops and Hard Forks

California follows federal treatment:

• Airdrops: Taxable as ordinary income at fair market value when received

• Hard Forks: Taxable when you have dominion and control over new tokens

 

Silicon Valley Startup Considerations

Founders receiving token allocations face complex planning around token launches, vesting, and liquidity events. California's rates amplify the importance of getting tax structure right.

Token Compensation

• Vested Tokens: Taxable as ordinary income at FMV when received—federal rates plus California's 13.3%

• Restricted Tokens: Taxable as tokens vest, unless Section 83(b) election filed within 30 days

• Section 83(b) Election: Pay tax immediately on grant-date value; subsequent appreciation taxed as capital gains

 

83(b) Planning

For early-stage tokens expected to appreciate significantly, the 83(b) election can save substantial taxes by converting future ordinary income into capital gains. However, if tokens become worthless, you cannot recover the tax paid.

 

NFT Creators in Los Angeles

Los Angeles has become a hub for NFT artists and creators. Income from NFT sales is ordinary income taxable at California rates when received—not when you convert to USD.

Key Considerations

• NFT sale income is taxable at fair market value when received in ETH or other crypto

• If ETH drops in value after receipt, you still owe tax on the original FMV

• Creator royalties are ordinary income when received

• Business expenses related to NFT creation may be deductible

 

Exit Planning: Leaving California

Given California's high rates, some investors consider relocating before realizing significant gains. California aggressively audits departing residents with substantial income.

Key Principles

• Timing: Realize gains after establishing residency in your new state

• Documentation: Thoroughly document your move and new domicile

• Day Counts: California will examine where you spent each day

• Connections: Reduce California ties (property, business, social connections)

 

California Residency Audit Factors

California's Franchise Tax Board examines:

• Physical location and day counts

• Location of spouse and dependents

• Location of personal property and real estate

• Business and employment connections

• Professional and social affiliations

• Voter registration and vehicle registration

• Financial account addresses

 

Tax Planning Strategies

Given California's high rates, strategic planning is essential for crypto investors.

Tax-Loss Harvesting

California follows federal rules—crypto is not subject to wash sale rules. You can sell at a loss and immediately repurchase to lock in the loss. Given California's 13.3% rate, harvested losses are particularly valuable.

 

Long-Term Holding

While California doesn't offer preferential state rates, federal long-term rates (0%, 15%, 20%) are significantly lower than short-term rates (up to 37%). Holding over one year saves substantial federal taxes even with California's flat treatment.

 

Charitable Donations

Donating appreciated crypto held over one year to qualified charities:

• Deduct fair market value

• Avoid recognizing capital gains

• California allows charitable deductions (subject to AGI limits)

 

Estimated Tax Payments

California requires quarterly estimated payments if you expect to owe $500 or more. Underpayment penalties apply. Quarterly deadlines generally align with federal dates.

 

Cryptocurrency Tax Services for California Investors

• California Tax Return Preparation: Complete Form 540 (resident) or 540NR (part-year/nonresident) with proper Schedule D and crypto gain reporting

• Federal Return Coordination: Integrated federal and California preparation ensuring consistency

• Transaction Reconciliation: Rev. Proc. 2024-28 compliant wallet-by-wallet tracking

• Form 1099-DA Matching: Reconciling exchange data to prevent FTB and IRS notices

• Tax-Loss Harvesting: Strategic loss realization without wash sale restrictions

• Exit Planning: Comprehensive guidance for establishing residency outside California

• Token Compensation Planning: Section 83(b) elections and vesting strategy

• Estimated Tax Planning: Quarterly projections to avoid California's underpayment penalties

• Audit Defense: Representation before IRS and California FTB

 

Areas We Serve in California

We serve California crypto investors statewide through our remote service model:

• San Francisco Bay Area: San Francisco, Oakland, San Jose, Silicon Valley, Palo Alto, Mountain View

• Los Angeles Area: Los Angeles, Santa Monica, Beverly Hills, Pasadena, Long Beach, Orange County

• San Diego: San Diego, La Jolla, Carlsbad

• Sacramento: Sacramento, Roseville, Folsom

• Other Areas: Clients throughout California via secure portal and video consultation

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Note: LA County residents may have extended filing deadlines (October 15, 2025 for 2024 returns) due to wildfire relief provisions.

 

Frequently Asked Questions

I'm moving from California to Texas. When should I realize my crypto gains?

After you've established Texas residency, not before. Gains realized while you're a California resident are taxable by California regardless of where you move afterward. The timing of your move relative to your planned sales is critical—consult us before making either decision.

 

Does California have a wealth tax on crypto holdings?

Not currently. Proposed wealth tax legislation has been introduced but not passed. California taxes realized gains, not unrealized appreciation. However, this is worth monitoring for clients with substantial holdings.

 

Can I use tax-loss harvesting to offset my California crypto gains?

Yes. California follows federal rules, and crypto is not subject to wash sale rules (unlike securities). You can sell at a loss and immediately repurchase without a 30-day waiting period. This strategy can be particularly valuable given California's high rates.

 

I received tokens from my startup. When do I owe California tax?

If tokens are vested when you receive them, you owe tax immediately on their fair market value as ordinary income. If they're subject to vesting, you owe tax as they vest—unless you file a Section 83(b) election within 30 days of grant to be taxed immediately on the grant-date value instead.

 

Has California issued specific crypto tax guidance?

No. Unlike New York (which issued TSB-M-14(5)C), the California Franchise Tax Board has not published specific cryptocurrency tax guidance. California follows federal treatment of crypto as property. The state has issued sales tax guidance confirming crypto is not tangible personal property.

 

Escape California Tax Rates—Legally

Whether you're staying in California and need to minimize your burden or planning an exit to a lower-tax state, we can help you build a strategy that works. Let's talk about your situation.

 

Schedule a Consultation

 

Phone: (862) 320-9554
Email: Greg@MonacoCPA.CPA

 

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