Bitcoin and Texas Franchise Tax: Key Insights into Intangible Property Ruling

Summary: A private letter ruling concluded that for Texas Franchise Tax purposes, bitcoin is treated as intangible personal property. Taxpayers in the business of buying and selling bitcoin cannot use the cost of goods sold deduction and must source sales of bitcoin to the location of the payor.

The Texas Comptroller of Public Accounts (Comptroller) recently issued a private letter ruling that addresses how sales of bitcoin (BTC) should be treated for Texas Franchise Tax (TFT) purposes.[1] The ruling provides much-needed clarity on whether BTC qualifies as tangible personal property (TPP), a security, or an intangible asset, and how that classification impacts TFT deductions and apportionment.

Background on Bitcoin Sales and Texas Franchise Tax

The taxpayer in question operates a business model centered around acquiring BTC and reselling it to customers through ATM transactions. Customers may purchase BTC directly by paying cash or loading cash into their BTC wallet through participating vendors, with the funds converting into BTC either immediately or within a few hours. The taxpayer’s gross profit is the spread between the price it paid to purchase BTC and the price at which it sold the BTC to its customers.

The TFT is imposed on taxable entities conducting business in the state, and the tax rate is applied to the entity’s taxable margin apportioned to Texas.[2] The taxable margin is calculated as total revenue minus one of four allowable deductions — cost of goods sold (COGS), compensation, 30% of gross income, or $1 million. Typically, the COGS deduction can only be claimed for certain costs related to real property or tangible personal property (TPP) sold.[3]

Evaluating Bitcoin as Tangible Personal Property

For this taxpayer, the COGS deduction produced the lowest taxable margin. In other words, if the taxpayer purchased BTC for $20 and sold it to its customer at the ATM for $23, the COGS deduction would allow the taxpayer to compute a taxable margin of $3. Therefore, the taxpayer requested a ruling that BTC should be treated as TPP for TFT purposes, seemingly no different than any business that has tangible inventory.

However, under Texas law, TPP is defined as “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.”[4] A computer program means “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.”[5] Based on these definitions, the Comptroller ruled that BTC does not satisfy the definition of TPP, and therefore, the taxpayer cannot use the COGS deduction.

Assessing Bitcoin’s Status as a Security

Alternatively, the taxpayer sought a ruling to treat BTC as a security.  The term “security” under the TFT is defined by referencing Internal Revenue Code (IRC) Section 475(c)(2) and includes instruments described under IRC Sections 475(e)(2)(B), (C), and (D).[6] The taxpayer requested this alternative security ruling since it may have supported a position that only the net gain from the sale of BTC would be included in its total revenue, providing a similar outcome to the COGS deduction.[7]

However, the Comptroller determined that BTC did not satisfy any of the types of securities as defined under IRC Section 475. Specifically, the Comptroller noted that the closest possible definitions under IRC Section 475 related to BTC as a currency, and both the IRC and Texas Department of Banking have existing guidance that BTC does not qualify as a security.[8]

The Ruling Explained: Bitcoin Classified as Intangible Property

Ultimately, the Comptroller concluded that BTC is intangible property. As a result, all costs related to acquiring BTC are ineligible for the COGS deduction. In addition, for apportionment purposes, the sale of an intangible asset is sourced to the location of the payor, which is the legal domicile of the payor.[9] 

Final Thoughts: Implications of Cryptocurrency Transactions

For businesses engaging in cryptocurrency transactions, it is important to analyze the available state tax guidance to understand the tax consequences of these types of transactions. Since only a handful of states have issued official BTC guidance, businesses whose revenue and income depends significantly on BTC transactions may benefit from requesting a private ruling to clarify their tax obligations.

[1] Texas Private Letter Ruling No. 20221114152021 (June 3, 2025)

[2] Texas Tax Code § 171.001 et seq.

[3] Texas Tax Code § 171.1012(a).

[4] Texas Tax Code § 171.1012(a)(3).

[5] Texas Tax Code § 151.0031.

[6] Texas Tax Code § 171.0001(13-a); Tex. Admin. Code 34 § 3.587(b)(12).

[7] See Tex. Admin. Code 34 § 3.587(e)(4).

[8] See Internal Revenue Service Notices 2014-21 and 2023-34, and Texas Department of Banking Supervisory Memorandum 1037.

[9] Tex. Admin. Code 34 §§ 3.591(b)(8) and 3.591(e)(21)(B).