Is selling bitcoin (or other cryptocurrency) taxed as a sale of tangible personal property or a security for Texas franchise (margin) tax purposes, and where is that revenue sourced?

Plain-English summary

A cryptocurrency ATM operator asked the Texas Comptroller how selling bitcoin (BTC) should be treated for Texas franchise (margin) tax purposes, proposing that a BTC sale is either a sale of tangible personal property (TPP) or a sale of a security. The Comptroller ruled it's neither — a sale of BTC is a sale of intangible property.

The reasoning walked through both alternatives the taxpayer proposed and rejected each:

• Not TPP. Tangible personal property has to be perceptible to the senses, or (for franchise tax purposes) a "computer program" — a coded series of instructions that lets a computer process data and provide results. A unit of BTC isn't perceptible to the senses, and it isn't a computer program either: it has no instructions of its own and doesn't process data, it just exists as an entry on the blockchain and can be transferred and tracked.
• Not a security. Texas franchise tax defines "security" by cross-reference to a specific federal tax code provision (26 U.S.C. § 475(c)(2)) covering things like notional principal contracts and interests in currency or commodities. BTC doesn't fit any of those categories, isn't "currency" under IRS or Texas Department of Banking guidance, and the SEC's broader "investment contract" test for securities isn't the definition Texas franchise tax uses.
• Is intangible property. Having ruled out TPP and security, and since BTC ownership is a transferable interest without physical substance, the Comptroller classified it as intangible property — the same bucket as things like patents, copyrights, and trademarks.

That classification has two practical consequences: (1) the taxpayer's costs to acquire the BTC it later resells are not deductible as cost of goods sold, because the COGS deduction is limited to costs tied to real property or tangible personal property; and (2) revenue from selling BTC is apportioned/sourced to the location of the payor (the customer paying for the BTC) under the intangible-asset sourcing rule, rather than under a tangible-goods sourcing rule.

What this means for you

Cryptocurrency businesses (exchanges, ATM operators, payment processors)

If your Texas franchise tax report includes revenue from buying and reselling bitcoin or similar cryptocurrency, this ruling tells you: don't take a COGS deduction for what you paid to acquire the crypto — intangible assets don't qualify. Also confirm you're sourcing that revenue to the location of the person paying you, not to your own location or where you executed the trade.

Accountants and tax professionals preparing Texas franchise tax returns for crypto clients

This is the first STAR guidance squarely classifying a specific cryptocurrency (BTC) as intangible property for Texas margin tax purposes, working through — and rejecting — both the TPP and security characterizations a taxpayer might otherwise argue for. Note the ruling deliberately distinguishes the franchise tax "security" definition (tied to IRC § 475(c)(2)) from the SEC's broader securities-law test, so don't assume SEC guidance on crypto controls the state tax answer.

Businesses with other digital/virtual assets

The reasoning here (not perceptible to the senses, not a coded computer program, not fitting the federal security cross-reference) is specific to how BTC works technically. A different digital asset with different technical characteristics (e.g., one built on a different mechanism, or one that functions as a stored value redeemable for a specific good) could come out differently — this ruling doesn't say all digital assets are automatically intangible property.

Common questions

Q: Can a business deduct what it paid to buy bitcoin before reselling it, as cost of goods sold on its Texas franchise tax report?
A: No. Because bitcoin is intangible property for Texas franchise tax purposes, acquisition costs don't qualify for the cost of goods sold deduction, which is limited to costs related to real property or tangible personal property.

Q: Where does revenue from selling bitcoin get sourced for Texas franchise tax apportionment?
A: To the location of the payor — the party paying for the bitcoin — under the intangible-asset apportionment rule in 34 Tex. Admin. Code Rule 3.591(e)(21)(B), not under a tangible-goods sourcing rule.

Q: Does Texas treat bitcoin as currency or as a security for franchise tax purposes?
A: No to both. The ruling found BTC isn't "currency" under IRS or Texas Department of Banking guidance, and doesn't meet the specific federal tax code definition of "security" that Texas franchise tax law cross-references (which is narrower than the SEC's securities-law test for digital assets).

Q: Can another cryptocurrency business rely directly on this ruling?
A: Not automatically. A private letter ruling binds the Comptroller only as to the taxpayer and facts described in the request. A business with materially different facts — a different token's technical design, for instance — would need its own ruling or should consult a tax professional before relying on this one.

Citations and references

Statutes and rules:

• Tex. Tax Code § 171.001 (Tax Imposed)
• Tex. Tax Code § 171.101(a)(1) (Determination of Taxable Margin)
• Tex. Tax Code § 171.1011(c) (Determination of Total Revenue from Entire Business)
• Tex. Tax Code § 171.1012(a), (a)(3) (Determination of Cost of Goods Sold; tangible personal property, including computer programs)
• Tex. Tax Code § 151.0031 (definition of "computer program")
• Tex. Tax Code § 171.0001(13-a) (General Definitions — "security")
• 26 U.S.C. § 475(c)(2), (e)(2)(B)-(D) (Internal Revenue Code security/commodity definitions cross-referenced by Texas franchise tax law)
• 34 Tex. Admin. Code Rule 3.591(e)(21), (e)(21)(B) (Margin: Apportionment — intangible asset sourced to location of payor)

Cited guidance and authority:

• IRS Notices 2014-21 and 2023-34 (bitcoin not treated as currency)
• Texas Department of Banking Supervisory Memorandum 1037 (bitcoin not treated as currency)
• SEC v. Wahi, No. 2:22-cv-01009 (W.D. Wash. July 21, 2022) and SEC v. Kik Interactive Inc. (S.D.N.Y. 2020) (discussed and distinguished — SEC's "investment contract" securities test does not control the Texas franchise tax "security" definition)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MAR
• Opinion: https://star.comptroller.texas.gov/view/202506007L

Original ruling text

Date: June 3, 2025

RE: Private Letter Ruling No. PLR20221114152021

Dear **,

We issue this private letter ruling in accordance with Rule 3.1 (Private Letter Rulings and General Information Letters). [ENDNOTE 1] We are responding to your request dated November 14, 2022. Detrimental reliance relief is provided in accordance with Rule 3.10 (Taxpayer Bill of Rights).

You requested guidance on the treatment of the sale of bitcoin (BTC) for franchise tax purposes, proposing that selling BTC is either the sale of tangible personal property (TPP) or the sale of a security.

Facts Presented

** (Taxpayer) is a qualified subchapter S subsidiary of COMPANY A, an S‐corporation for federal tax purposes. All business activities are conducted by Taxpayer. Taxpayer and COMPANY A file a combined Texas franchise tax report.

Taxpayer’s business model is to acquire BTC and resell it to customers in exchange for cash at ATM machines. Customers can also load cash to their BTC wallet to then purchase BTC. In addition to the ATM transactions, Taxpayer also provides SERVICE-1, which allows customers to go to participating vendors to add cash to the customer’s BTC wallet. Once the cash is added it will automatically be converted to BTC within two hours or the customer can choose to do it instantly.

BTC is a cryptographic currency, also known as “cryptocurrency” or “virtual currency.” The term BTC can be used to describe both the larger payment system and specific units. Cryptocurrencies rely on software protocols to generate units, referred to as “tokens,” and validate transactions on a public ledger, referred to as the “blockchain.” A copy of the blockchain exists on every computer running BTC software. BTC are not actually received by software on a computer; they are appended to the blockchain which is shared by all devices on the network.

There is not a clear definition of what an individual BTC is. The most common and accepted definitions of a BTC are a digital asset and/or digital token stored at a certain address. See Lewis, Antony, The Basics of Bitcoins and Blockchains, 2018, page 150. The tokens are also referred to as “intrinsic” or “built-in” tokens because they are inseparable from the cryptocurrency’s blockchain system. Id at 306.

A BTC address is an identifier of 26-35 alphanumeric characters that represents a possible destination for a BTC payment. A BTC address is made up of a public key (set of numbers), which is the BTC’s address on the blockchain, and a private key, which is essentially a password used by the holder to access BTCs at that address.

Questions, Rulings, and Analysis

Our restatement of your question is shown below, followed by our response and analysis.

Question:

How is the sale of BTC treated for franchise tax purposes?

Ruling:

For franchise tax purposes, the sale of BTC is the sale of intangible property. Costs for acquiring BTC are ineligible for the cost of goods sold deduction (COGS) because BTC is intangible property. The sale of an intangible asset is sourced to the location of the payor under Rule 3.591(e)(21)(B) (Margin: Apportionment).

Analysis:

Franchise tax is imposed on each taxable entity doing business in Texas or that is organized in Texas. Section 171.001 (Tax Imposed). The taxable margin of a taxable entity is determined by calculating 70% of total revenue from the entity’s entire business, subtracting $1 million from the total revenue from the entity’s entire business, or by subtracting, at the election of the entity, either COGS or compensation. Section 171.101(a)(1) (Determination of Taxable Margin). Total revenue is based on the amounts reportable on various lines of the taxable entity’s federal income tax return less statutorily allowed exclusions. Section 171.1011(c) (Determination of Total Revenue from Entire Business). A taxable entity may only take a COGS deduction for certain costs related to real property or tangible personal property sold. Section 171.1012(a) (Determination of Cost of Goods Sold).

TPP

TPP is defined in Section 171.1012(a)(3) to include: “personal property that can be seen, weighed, measured, felt, or touched or that is perceptible to the senses in any other manner… and a computer program, as defined by Section 151.0031” (Computer Program). Section 151.0031 defines a computer program as “a series of instructions that are coded for acceptance or use by a computer system and that are designed to permit the computer system to process data and provide results and information.”

BTC is not personal property that is perceptible to the senses in some manner. Therefore, if BTC is to be considered TPP, it would have to be considered a computer program. However, an individual BTC is not a 1) series of instructions; 2) coded for acceptance or use by a computer system; and 3) designed to permit the computer system to process data and provide results and information.

A BTC only exists on the blockchain; BTC are not actually received by software on a computer. The blockchain is present on every computer that installs the BTC software, and everyone always has access to it. BTC is inseparable from the cryptocurrency’s blockchain software system and has no functions other than being associated with a blockchain address, being transferrable to another address, and having its transfer recorded. There are no instructions associated with a BTC and a BTC does not permit a computer system to process data and provide results and information. As BTC is not perceptible to the senses and is not a computer program, BTC is not TPP.

Security

Section 171.0001(13-a) (General Definitions) defines a security as “…the meaning assigned by Section 475(c)(2), Internal Revenue Code (IRC), and includes instruments described by Sections 475(e)(2)(B), (C), and (D) of that code.” The instruments listed in IRC Sections 475(e)(2)(B), (C), and (D), include: a notional principal contract; any evidence of an interest in, or a derivative instrument in, any commodity…including any option, forward contract, futures contract, short position, and any similar instrument; and any position which, among other criteria, is a hedge with respect to a commodity. BTC does not fall under any of these instruments.

The only relevant definitions in IRC Section 475(c)(2) are: currency; evidence of an interest in, or a derivative financial instrument in, currency; and any option, forward contract, short position, and any similar financial instrument in such a security or currency. Although you can have options, forward contracts, and similar positions related to BTC, BTC are not an interest or derivative financial instrument in any currency as they have no relationship with any “real” currency.

BTC also does not qualify as “currency.” Neither the Internal Revenue Service, in Notices 2014-21 and 2023-34, nor the Texas Department of Banking, in Supervisory Memorandum 1037, consider BTC to be currency under their most recent guidance.

The Securities Exchange Commission considers cryptocurrency to be a security if “it meets the definition of a security, which the Securities Act defines to include ‘investment contract,’ i.e., if it constitutes an investment of money, in a common enterprise, with a reasonable expectation of profit derived from the efforts of others.” See Sec. & Exch. Comm'n v. Wahi, 2:22-cv-01009, page 8, 7/21/2022. See also Strategic Hub for Innovation and Financial of the SEC, Framework for “Investment Contract” Analysis of Digital Assets. However, this is not the same definition of “security” used for franchise tax purposes as Chapter 171 (Franchise Tax) does not include “investment contract” in its definition of a security. Section 171.0001(13-a) references 26 U.S. Code § 475, whereas the SEC references 15 U.S. Code § 77b. See U.S. Securities and Exchange Commission v. Kik Interactive Inc., (S.D.N.Y. 2020).

Intangible Asset

Intangible property can generally be defined as something that a person can own and can transfer but has no physical substance, such as copyright, trademarks and patents. See Wikipedia, https://en.wikipedia.org/wiki/Intangible_property. Although intangible property is not specifically defined in Chapter 171 or Rule 3.591, references to intangible property include patents, copyrights, royalties, and trademarks. Section 171.0004(d) (Definition of Conducting Active Trade or Business) and Rule 3.591(e)(21). These examples all entail an ownership interest and are not tangible. Given that ownership of BTC entails an interest in the property and that BTC is not tangible and cannot be said to be TPP or a security, BTC is considered an intangible asset for franchise tax purposes. This mirrors the guidance of other states and IRS treatment. See Wolters Kluwer, Cryptocurrency and state legislation: the current state of crypto state taxes in 2023, January 2023. See also IRS form 1120.

Because BTC is intangible property, costs related to acquiring BTC are ineligible for the COGS deduction. A taxable entity may only take the COGS deduction for certain costs related to real property or tangible personal property sold. Section 171.1012(a). For COGS purposes, intangible property is explicitly excluded from the definition of tangible personal property. Section 171.1012(a)(3)(B)(i). For apportionment purposes, the sale of an intangible asset is sourced to the location of payor under Rule 3.591(e)(21)(B).

The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. 20221114152021.

Sincerely,

Tax Policy Division – Direct Taxes

Texas Comptroller of Public Accounts

ENDNOTE

1 Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.