For most California taxpayers, the answer is yes. California treats taxable gains and income from cryptocurrency the same way it treats gains and income from other property. The California Franchise Tax Board (FTB) generally starts with your federal adjusted gross income (AGI) and other figures from your federal return, then applies California-specific conformity and adjustment rules. California has no special or preferential capital gains rate, so any gain the federal government treats as a capital gain on cryptocurrency simply flows into your California return and is taxed at your ordinary California income tax rate, which can reach 13.3 percent for high earners.
California tax law generally conforms to the Internal Revenue Code with modifications. Federal law treats digital assets, including cryptocurrency, as property rather than currency, and applies ordinary property transaction rules to sales, exchanges, payments, and many types of rewards. As a result, when you sell crypto for dollars, trade one coin for another, spend crypto on goods or services, or receive staking or mining rewards, you are creating federal taxable events that usually carry through to California. For California residents, these crypto gains and income are part of worldwide income and are fully taxable here unless a specific California nonconformity rule applies.
How Federal Crypto Rules Flow into California Returns
At the federal level, the IRS treats “digital assets,” including convertible virtual currencies and many tokens, as property. Gains and losses are recognized when you sell or exchange crypto, convert it to dollars or other fiat, or use it to pay for goods, services, or other digital assets. Mining and many staking rewards are ordinary income when received, with later disposition of the rewarded coins producing capital gain or loss.
Residency, Sourcing, and Out-of-State Moves
For California residents, the rule is simple and harsh. If you are a resident, California taxes your income from all sources worldwide, including crypto gains realized while you were living here, even if the exchanges occurred on foreign platforms or while you were physically outside the state for temporary or transitory reasons. Many crypto investors have discovered this only after FTB opens a residency or filing compliance audit that reaches back several years.
For nonresidents and part-year residents, the analysis turns on California source rules and your periods of residency. Nonresidents are taxable only on California-source income, and part-year residents are taxable on worldwide income for the resident portion of the year and on California-source income for the nonresident portion. Under California regulations and long-standing case law, gain from the sale of intangible personal property, such as stock or other investment property, is generally sourced to the seller’s state of residence, unless the intangible has acquired a business situs in California. Cryptocurrency is increasingly treated as an intangible for other California legal purposes as well, for example, under recent unclaimed property legislation defining “digital financial assets” as intangible property.
In practice, this means that a true nonresident who simply holds and trades crypto in personal, non-business accounts will usually not owe California tax on those gains, even if trades clear through a California exchange, unless the crypto has been integrated into a California trade or business in a way that creates business situs. By contrast, a California resident who moves out of the state and then sells previously accrued crypto can trigger complex sourcing issues about when the gain was realized and whether part of it must still be reported to California, mainly where significant appreciation occurred while the person was a resident and the asset is tied to a California business or pass-through entity. Residency timing and the business or personal nature of your crypto holdings are, therefore, critical to planning exits or relocations.
How Sales and Use Tax Interact with Cryptocurrency
While most crypto discussions focus on income tax, California’s sales and use tax rules also touch digital assets, though not by directly taxing crypto gains. The California Department of Tax and Fee Administration has explained that sales and use tax applies to sales of tangible personal property. Buying and selling cryptocurrency itself is not a taxable sale of tangible property for sales and use tax purposes, so you do not incur sales tax merely by exchanging Bitcoin for dollars or trading one coin for another.
However, when you use cryptocurrency as a payment method to buy taxable tangible goods or services in California, the transaction is treated similarly to a purchase with cash or a barter transaction. For sales and use tax purposes, California taxes purchases funded with crypto the same way it taxes purchases funded with dollars, because the tax applies to the sale of taxable tangible goods or services regardless of the payment method. You therefore face two distinct tax consequences in that scenario: a taxable disposition of the crypto for income tax purposes, and ordinary California sales or use tax on the underlying goods or services if they are within the sales tax base. Properly tracking basis and fair market value at the time of the transaction is essential to getting both sides of that equation right.
Compliance, Reporting, and High-Risk Crypto Profiles
California does not currently have a dedicated crypto checkbox on Form 540 comparable to the digital asset question on federal returns, but that does not mean the FTB is indifferent. California law explicitly ties capital gains reporting to general property-transaction rules, and the FTB has made clear that all capital gains must be reported and that there is no separate capital gains rate. Because California generally imports your federal capital gains and ordinary income figures, failing to include crypto activity on your federal return usually means it is also missing from your California return.
FTB has robust data matching tools and receives extensive information from the IRS and from payers that issue Forms W-2, 1099, and other information returns. Crypto exchanges and other intermediaries that operate in or service California may generate information returns (for example, Forms 1099) that are shared with FTB when a taxpayer has a California address or other California connections. As federal rules continue to expand broker reporting for digital assets, state agencies will increasingly gain visibility into crypto gains and income that previously went unreported.
Unreported or underreported crypto activity can quickly move a case into “high risk” territory. For income tax, California’s standard four-year assessment window generally runs from the date you file a return, but that protection can be extended or eliminated where there is fraud, substantial omissions, or a failure to file. Long patterns of unfiled or inaccurate returns involving significant crypto gains, especially when records are missing, offshore exchanges are used, or cash is deposited into unreported bank accounts, can trigger parallel federal and state investigations. At that stage, what begins as a civil audit can become an “eggshell” exam where every statement you make may affect whether the matter remains civil or is referred for a life-destroying criminal tax investigation.
Contact the Tax Law Offices of David W. Klasing if You Have Unreported Cryptocurrency Income
If you have traded, mined, staked, or spent cryptocurrency and are not entirely confident that all of your activity has been reported adequately for California income tax purposes, you are wise to address the issue before the FTB or another agency does it for you. The combination of federal digital asset reporting, California’s conformity to federal income tax rules, and California’s aggressive residency and sourcing enforcement makes crypto one of the most scrutinized areas in modern tax practice. At the Tax Law Offices of David W. Klasing, our nationally recognized dual licensed Civil and Criminal Tax Defense Attorneys and CPAs focus on precisely these high-risk, cross-border, and multi-year tax problems.
We routinely help California residents, part-year residents, and nonresidents reconstruct crypto trading histories, analyze residency and sourcing, and design corrective strategies, including amended returns, catch-up filings, and, where appropriate, voluntary disclosure approaches that aim to minimize both civil penalties and criminal exposure. When a federal or California state audit is already underway, we step in to take control of communications, manage document production, and position your case to give it the best chance of remaining a civil matter and resolving as favorably as the facts allow. Because the firm’s CPAs are employees of the Tax Law Offices of David W. Klasing and work as part of the legal team under the direct supervision of our attorneys, their analysis, calculations, and consultations are generally protected under the attorney-client privilege and attorney work product doctrines, which is critical when you are disclosing sensitive cryptocurrency activity.
We offer confidential, reduced-rate initial consultations in which we review your crypto activity, explain how California law applies to your specific facts, and outline practical paths to getting compliant without unnecessarily inviting enforcement. To schedule a consultation, call the Tax Law Offices of David W. Klasing at (800) 681-1295 or contact us online HERE today.
