Non Fungible Tokens(NFTs) And Sales Tax: Why The Details Are Important To Pay Attention To

In this article, we share why understanding specific details related to NFTs is so important for ensuring sales tax compliance.

As NFTs, or non-fungible tokens, have gained popularity worldwide, we are beginning to see sales tax questions arise about these products. As with other digital products, the details are vital to understanding your sales tax obligations.

When Are NFTs Subject To State Sales Tax?

Very few states have issued specific guidance on whether the sale of an NFT is subject to sales tax. So how do NFT sellers know if they should collect and remit sales tax in each state they have NFT sales in? First, we can look at a state’s legislation regarding digital products. Traditionally, only tangible personal property was eligible for sales tax, but when digital products gained traction, some states began to implement taxes on them. The devil is in the details, however, because the definition of a ‘digital product’ varies by state. Some states say that if a digital product is taxable in its tangible form, then it is taxable in its intangible form. Some states actually treat intangible goods as tangible personal property (TPP) because they can be seen and experienced, and some don’t tax digital products at all because they are intangible.

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Non-Fungible Tokens

As the 2021/2022 fiscal year ended on June 30, many states implemented sales tax legislation reforms. In this blog article, we share a few standout updates you should know about.

Washington State Department of Revenue & NFT Sales Tax

NFTs, or non-fungible tokens, have been around since 2014, but started gaining momentum in 2021 and have only risen in popularity since. As you can imagine, this has created some sales tax confusion.

Washington state is one of the few states to tackle the taxiblity of NFTs, and on July 1, 2022, the Washington State Department of Revenue published an interim statement on how sales tax applies to NFTs. The statement is “intended to provide general information related to the taxability of certain transactions involving NFTs and does not intend to address any exemptions, exclusions, deductions, credits or other incentives that may apply.” The interim statement functionally defines NFTs as a digital code.

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Monika Miles - As NFTs Gain Popularity, What Are The Sales Tax Ramifications?

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

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The Taxation of NFTs

An NFT from digital artist Beeple selling for $69 million? An NFT of Twitter CEO Jack Dorsey’s first ever tweet fetching a price of almost $3 million? These sales represent only a fraction of the NFT market, which has seen sales volume totaling $13.2 billion so far in 2021.

The exploding popularity of NFTs will continue to draw more scrutiny from the IRS, as the agency debates how to best capture and subject NFT sales and exchanges to taxes. But the IRS has offered limited guidance on NFTs so far, leaving creators/dealers and investors of NFTs to navigate an uncertain tax regulatory landscape. Drawing from existing IRS guidance on cryptocurrencies and traditional tax principles, this blog post will attempt to fill in the blanks on the taxation of NFTs, both from the perspectives of creators/dealers and investors.

What are NFTs?

Before diving into the taxation of NFTs, a discussion on what NFTs are and why they have become so valuable is in order. In general, NFTs, or non-fungible tokens, are digital representations of texts, images, videos, or other content that are stored on a blockchain network like other cryptocurrencies. But unlike Bitcoin or Ethereum, NFTs are nonfungible digital assets, meaning they are unique and can’t be replaced with anything else. In this regard, NFTs are similar to unique trading cards or diamonds – if you exchanged them for another card or diamond, you would receive something completely different in return.

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