Washington becomes the first US state to tax NFTs

The state of Washington added NFTs (non-fungible tokens) to the list of properties subject to its sales and use tax provisions in July, making it the first US state to do so — though it likely won’t be the last.

Sales taxes apply to the purchase of all goods or services by consumers and businesses, while a use tax is imposed on state tax returns where no sales tax has been paid, for example for goods and services from foreign suppliers, and that the amount is equal to the sales tax in the state where the goods were sold . The volume of NFT sales in the US and worldwide is anyone’s guess, but blockchain tracking company NonFungible.com estimated $17 billion in NFT transactions worldwide in 2021, and others put that number at $25 billion.

“Over the past few years, states have seen the prices of NFTs increase,” says New York attorney Amelia K. Brankov. All that money is attracting the interest of revenue officials, and “some states are focusing on the tax liability of NFT sales”. In Washington, the sales tax rate is 6.5%, but that may be the only thing that is clear about this process.

Taxation of NFTs is complicated by uncertainty about where they are “sourced”, which can be a tricky issue with an NFT sale, which is usually done through a transfer of the asset to a digital wallet, not a physical address. There are many digital marketplaces, and some states currently require that they collect a sales tax, but compliance has been inconsistent. If a marketplace fails to collect the fee, the buyer can be held responsible for it.

In addition, some states recognize digital products such as NFTs as taxable, while others do not, making it confusing to determine whether taxes are due. At press time, 32 states have rules that allow taxation of digital products, including Pennsylvania, Texas, and Washington, while 12 specifically exempt these items, including California, Florida, and New York. Agustin M. Barbara, a managing partner at the Miami-based firm The Crypto Lawyers, says that many of these 32 states “already have the statutory framework in place that would allow for the taxation of NFT sales, although the statutory language does not explicitly mention NFTs”.

Federal rules are clearer

There is less confusion at the federal level, as the Internal Revenue Service (IRS) announced in 2014 that it would treat cryptocurrencies as property, so that whenever an owner of cryptocurrency spends it, that person would pay taxes on any gains. In addition comes the 2018 Supreme Court decision in South Dakota v. Wayfair— which ruled that businesses without a physical presence in a state with more than 200 transactions or $100,000 of in-state sales must collect and pay sales tax on in-state transactions — will likely be applied to NFT sales platforms.

In the coming months, the IRS is expected to issue guidelines for federal taxation of digital assets, a revenue-generating provision in the Biden administration’s infrastructure law passed last fall. This provision requires brokers of digital products, such as sales platforms, to obtain physical addresses and social security numbers of buyers and sellers, and these brokers will have to file information returns (1099 forms) that users of their sites need when filing personal taxes. returns.

The ability of Washington, or any other state, to enforce sales tax on NFTs will depend on the existence of 1099 forms, said Rosemary Ringwald, national head of art planning at Bank of America’s private banking division. “Washington State is breaking new ground in this, but it is inevitable that other states will follow.”