New release from the IRS: results of its snooping on virtual currency habits via 2020 tax returns. Find out if your town–or your state–has more than its share of bitcoin believers.
By William Baldwin, Senior Contributor
Fans of virtual currencies congregate in some places and not in others. There’s now a way to pinpoint crypto intensity in the U.S.
From circumstantial evidence, you can conclude that if you’re in an area that shows up on a crypto heat map, you’re probably surrounded by taxpayers who are young, rich or employed as coders.
Not surprisingly, California leads in the number of locales where a high percentage of the population owns bitcoin or one of its competitors. But in a state-by-state ranking, Washington beats California.
Noteworthy: how relatively out of favor digital speculating is in flyover country. Among upper-bracket taxpayers, there’s a 13-fold difference in cryptocurrency uptake between the states of Washington and West Virginia.
Such revelations are fallout in the government’s decade-long war against mischief involving digital assets. Convinced that coin owners are failing to report capital gains, the Internal Revenue Service has demanded that exchanges like Coinbase and Kraken reveal their customers’ secrets. The Department of Justice is extracting a $4 billion penalty from Binance over money-laundering violations. On dozens of occasions, the feds have penetrated the seemingly anonymous trail of blockchain transactions to retrieve stolen coins or get evidence of other crimes, like drug dealing.
One important element of this crackdown is the requirement, beginning with year 2020 tax returns, that taxpayers state whether they have had any crypto transactions during the year. Although the confessional has since been reworded to snare only people who have either cashed in virtual currency or received it as payment, in that first round-up you also had to answer “Yes” in the checkbox if you did nothing but buy a digital asset during the year.
Coming out of this fishing expedition: a pretty good survey of crypto penetration in the U.S. as of three years ago, at least among the subset of taxpayers who don’t want to risk prosecution for perjury. The IRS recently published the results, in its statistical summary of Form 1040s by Zip Code.
The file has, it appears, at least 20 million data points. I sifted through the haystack, focusing on the 9.3 million returns that showed more than $200,000 in adjusted gross income. Crypto adoption is highest in the upper brackets.
Nationally, 1 in 47 upper-bracket taxpayers checks the box. The geographic dispersion of the odds is quite large. On the West Coast (three states combined) the frequency is 1 in 29; in 21 states it’s not even 1 in 100.
Virtual Currency Fans, State Ranking
Blue states have more than their share of crypto lovers. Exceptions to the pattern: Maine, with an older than average population, and Texas, home to bitcoin miners.
Demographics explain some of this. Youngsters are captivated by digital assets; fogies are not. Washington (state), California and the District of Columbia all have younger populations, as measured by median age, than the country as a whole. Vermont, West Virginia and Maine have older populations than the U.S.
Career choice is perhaps an even larger determinant of crypto prevalence. Programmers and data scientists are found in large numbers in California and Washington. Presumably they are more prone than ordinary folk to sink money into a sequence of digits. That’s all a bitcoin is: a string of 256 0s and 1s, representing a single large integer. Some of these integers are worth $42,000, the rest nothing. To a Nebraska corn farmer this is a quaint notion.
Politics? There’s a correlation, with blue states more likely than red ones to land in high-crypto territory. Maine and Texas are conspicuous exceptions to the pattern.
Now let’s home in on the neighborhoods where crypto ownership is high. I found 44 Zip Codes with at least a 7% rate of uptake. A few of these are in business districts, where the address on a 1040 may be that of an accounting firm. Most, however, are residential areas that are near a software-heavy firm and/or where wealthy people live.
Examples of proximity to software work: locales close to the headquarters of Amazon and Microsoft in Washington, and Apple and Alphabet in Silicon Valley. Examples of a wealth effect: two neighborhoods in San Francisco where average incomes, among tax returns showing at least $200,000, exceed $1 million. The digital assets rate is 9.3% in the San Francisco area (Zip 94110) where Mark Zuckerberg had a house. He unloaded it last year for $31 million.
Cryptocurrency Hot Spots
Density of digital assets is high near the San Francisco Bay, especially in rich neighborhoods.
Digital asset ownership is fairly high in Texas, where cheap electricity and relaxed environmental regulation have attracted bitcoin miners. None of its neighborhoods clears the 7% threshold, but a piece of Austin (78704) comes close at 6.5%.
It’s possible that crypto will spread in time to more places where people have outsized portfolios but not necessarily any connection to silicon. That would happen if wealth managers like Fidelity Investments persuade their clients that an allocation to this ethereal asset class is a wise form of diversification.
Equally possible: Bitcoin’s price drifts closer to what one prominent Nebraskan, Warren Buffett, views as its productive value. That would be $0. Perhaps someday the only fans will be coders, staring at their strings of 0s and 1s.