NFTs, the New Frontier of Taxes

NFTs, the New Frontier of Taxes

September 30, 2022

Americo Rodriguez, MST

The non-fungible token (NFT) market is growing fast and state officials are starting to pay attention. From 2020 to 2021, sales of NFTs jumped from $95 million to $25.5 billion. Some sales have even grabbed national headlines. The New York Times reported digital artist Beeple sold a JPG file of a digital collage for $69 million, among a whirlwind of bids. With numbers like that, states can no longer ignore NFTs as immaterial and no doubt will want to receive a piece of the action.

What are NFTs again? NFTs (non-fungible tokens) can be anything digital such as an image, drawing, or music that primarily use the Ethereum blockchain to create unique units that can then be exchanged and gain value. While NFTs are not tangible in true sense of the word, they do represent real ownership in an underlying asset.

How are states starting to tax these types of transactions so far? Given the lack of guidance from most jurisdictions, sellers and purchasers are, for the most part, currently ignoring potential sales tax implications on NFT transactions.

Recent U.S. State & Territory Developments for Taxing NFTs

PENNSYLVANIA

In May 2022, the Pennsylvania Department of Revenue released an informational booklet on sales and use tax for Pennsylvania retailers which specifically identifies that sales and use tax applies to the sale of NFTs (unless the transfer is otherwise exempt) under the category of “computer hardware, digital products and streaming services.”

PUERTO RICO

Puerto Rico has issued a regulation which places NFTs into Puerto Rico’s definitions of “specific digital products” that are subject to sales tax.

WASHINGTON

On July 1, 2022, the Washington State Department of Revenue published an interim statement on how sales tax applies to non-fungible tokens in Washington. The statement provides definitions for key terms as well as examples for sellers and purchasers of NFTs. It is by far the most robust attempt to address NFTs and sales tax.

The Multistate Tax Commission and the Streamlined Sales Tax Governing Board are also working to determine how to best classify NFTs for sales tax purposes.

State Officials are Moving Slowly to Adapt Laws

The remaining states that subject digital goods to sales tax have, for the most part, been silent. There could be good reason for that, too. We’ve previously discussed how states move slowly to adapt their laws. When it comes to NFTs, one contributing factor could be that the manner in which NFTs are sold is still evolving.

For example, NFTs are now being bundled with tangible personal property, rights to services, or ownership of financial instruments. Adding these standards to NFT stand-alone transactions can alter the very essence of how the transaction is viewed from a sales and use tax perspective. States that are already enacting rules know they will likely have to revisit them as the NFT market develops.

Key Tax Issues Remain for NFTs

Key issues remain to be addressed even in jurisdictions that have begun taking steps to address the tax landscape for NFTs. One issue being how NFT transactions are sourced, whether stand-alone or bundled with something else. Washington State’s interim statement certainly represents a step forward, and as a full member of the Streamlined Sales Tax Governing Board, there are some fall back provisions when it comes to sourcing. The same cannot be said for Puerto Rico or Pennsylvania.

REDW’s State and Local Tax (SALT) team provides practical solutions to complex issues and keeps you informed on tax laws that presently (or will) affect you. Contact Senior Manager Americo Rodriguez with any questions on the developing tax landscape for non-fungible tokens, below.


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