This article was updated on November 22, 2022.
In mid-2022, Pennsylvania and Washington became the first two states to publish authoritative written guidance on the state sales tax implications of buying and selling NFTs. Both states have indicated that NFTs may be subject to sales tax. These updates don’t represent changes in the law, but they’re interpretations of existing law that could be applied both retroactively and prospectively.
Pennsylvania Versus Washington
For Pennsylvania, this update doesn’t represent a change in the law, but is an interpretation of existing law that could be applied both retroactively and prospectively.
For Washington, the Department of Revenue clarified on October 26, 2022, that this guidance has retroactive application.
Pennsylvania NFT Tax Guidance
Pennsylvania provided limited guidance on NFT tax expectations. It added NFTs to a list of items that are considered to be subject to sales tax, absent an applicable exemption. Pennsylvania’s guidance stopped short of providing analysis or definitions around NFTs.
From this guidance, Pennsylvania’s taxable classification of NFTs seems to primarily refer to the popular digital artwork NFTs garnering media headlines through much of 2021. This limited guidance could present issues in cases where an NFT seems to be acting as a pseudo certificate of authenticity and an attempt to sidestep Pennsylvania sales tax.
Washington NFT Tax Guidance
Washington state published a more comprehensive analysis around a few key features, including instructions on how to characterize an NFT, as summarized below.
- Define NFTs with examples
- Determine taxable types of NFTs
- Detail how to calculate the tax due
- Explain how to source the sale
Key Features of NFT Sales Tax
Sales of NFTs are generally subject to retailing business and occupancy (B&O) tax and retail sales tax if the object of the NFT purchase is one of the following:
- Stand-alone digital product. Digital artwork, photographs, video clips, or autographs
- Stand-alone retail good or service. Remote access software or digital automated services
- Bundled sale of taxable and non-taxable items. Can’t meet bundled transaction exceptions
Online NFT marketplaces may be considered marketplace facilitators such that they would need to collect and remit Washington retail sales tax on marketplace sales on behalf of NFT sellers.
The Washington State Department of Revenue expects that NFT sellers and NFT marketplaces will collect purchaser location information to be able to charge Washington sales tax at the correct state, county, and city rates.
Broad State Tax Trends
Washington and Pennsylvania may have been the first to take the step of publishing guidance that explicitly states NFTs are taxable, but many other states have communicated intent to publish similar guidance with both retroactive and prospective applications.
Potential NFT Tax Issues
One major issue that isn’t addressed by the guidance is that most NFT sellers and marketplaces don’t know who their customers are or where they’re located, because transactions are conducted online with electronic delivery and payment in cryptocurrency.
Without collecting their customer locations, NFT sellers and marketplaces won’t be able to accurately comply with NFT sales tax reporting obligations.
For example, an NFT marketplace that facilitates the sale of NFTs between third parties can’t determine which state, county, city, or special purpose district sales tax rate would apply to a sale if the NFT marketplace doesn’t have at least a partial address for either customer or seller.
Many NFT-based businesses may be hesitant to start collecting customer location information for fear of losing their market-share to competitors who aren’t collecting this information.
However, holding out while waiting for competitors to begin following state tax guidance risks incurring additional state tax liabilities, penalties, and interest that may not be easily contestable on the grounds that the company didn’t collect enough information to maintain adequate books and records.
We’re Here to Help
To learn more about state tax implications regarding blockchains, cryptocurrency, and NFTs, you can explore our resources or contact your Moss Adams professional.