Non-Fungible Tokens, or NFTs, have been around since 2014, but only obtained mainstream use in 2021. According to the Economic Times, NFTs have only gained momentum since. This is due to a variety of reasons including the connection with the metaverse and celebrities jumping on the NFT bandwagon. As a result, NFT sales have soared, with some bringing in millions of dollars. With the popularity of NFTs rising, what are the sales tax ramifications? In this blog article, we explore this new and multifaceted area of taxes.

What Is An NFT? 

Before we explore NFT sales tax implications, let’s clarify what an NFT is. An NFT is a digital asset that represents real-world objects like music, art and videos. Just about anything can be an NFT, and this link shares a list of some of the most popular types  such as collectables, trading cards, art, memes and more. NFTs are bought and sold online, usually with cryptocurrency, a decentralized digital money based on blockchain technology like Bitcoin. As we mentioned above, NFTs have gained traction in recent years, especially as a way to buy and sell digital artwork. According to Forbes, about $174 million has been spent on NFTs since November 2017. NFTs stand out among most digital creations, because they are generally either very limited, or one of a kind, and have unique identifying codes.

NFTs And Sales Tax

According to Bloomberg Tax, at least 31 states apply sales taxes to digital products and services, some of which are broad enough to likely include NFTs if they can be viewed (like artwork or trading cards) or heard (like music). No state in the United States currently implements specific NFT sales tax legislation. However, both Washington state and Puerto Rico are drafting regulations that would include NFTs in the definition of digital products when it comes to sales tax obligations. Once NFTs are added to this definition, it certainly raises questions about the sales tax ramifications. What kinds of transactions will trigger a tax collection duty? Given the anonymity embedded in many NFT transactions, how will the IRS (and in this case, states) source transactions and trace the identities of buyers and sellers? Stay caught up with our blog, as we will continue to follow this new and emerging aspect of sales tax and NFTs.

What Should You Be Aware Of As A Buyer Or Seller To Comply With All NFT Sales Tax Liabilities?

• What if I sell an NFT online directly to a purchaser?

Due to the landmark decision in South Dakota v. Wayfair (2018), every state with sales tax has introduced some level of economic nexus, meaning that a seller does not need to have physical presence in a state in order for the state to require the seller to collect its sales tax (if it meets a certain threshold of sales). This would include NFT sales if that state’s digital product sales tax requirements are broad enough to include them.

• What if the buyer’s state taxes digital products, but mine does not?

If the seller meets the threshold for total sales or separate sales transactions in the purchaser’s state, then the seller would generally be required to collect and remit sales tax for that state.  The seller should then look at the potential taxability of the NFT and determine the filing requirements. Some states may not require the registration for sales tax if all sales are non-taxable.

• How do I remit sales tax to the states that I am responsible for?

As with all multistate sellers, an NFT seller must register with the state tax agency to obtain a sales tax license or permit. This can be overwhelming, especially if you are a small seller and need to register in multiple states. Some states also allow their municipalities to administer their own local sales tax, which would require filing at the local level in those states. We recommend reaching out to qualified multi-state tax professionals, like our team at Miles Consulting, to help guide you through this process.

Have a question about NFTs and State Sales Tax Compliance?

Contact Monika Miles Sales Tax Consulting And Team.