• Washington is the first state in the United States to tax NFTs

  • In July, Washington state became the first American state to add non-fungible tokens (NFTs) to the list of properties subject to its sales and use tax regulations, though it is unlikely to be the last.

    Sales taxes apply to all goods and services purchased by consumers and businesses, whereas a use tax is applied on state tax returns where no sales tax was paid, such as for goods and services purchased from out-of-state vendors, and the amount is equal to the sales tax in the state where the items were sold. The magnitude of NFT sales in the US and globally is unknown, although the blockchain tracking startup NonFungible.com estimates $17 billion in NFT transactions worldwide in 2021, with others estimating $25 billion.

    “In the past several years, states have seen the prices for NFTs soar,” says the New York lawyer Amelia K. Brankov. All of that money piques the interest of revenue officials, and “some states are narrowing in on the taxability of NFT sales.” The sales tax in Washington is 6.5%, but it may be the only thing that is certain about this process.

    Uncertainty over where NFTs are “sourced” complicates taxation, which can be a problematic subject with an NFT sale, which is normally handled by a transfer of the asset to a digital wallet rather than a physical address. There are many digital marketplaces, and some states require them to collect sales tax, but compliance has been spotty. If a marketplace does not collect the tax, the buyer may be held accountable.

    Aside from that, some states consider digital products like NFTs to be taxable, while others do not, making determining whether or not taxes are payable difficult. At the time of publication, 32 states, including Pennsylvania, Texas, and Washington, permitted the taxation of digital products, while 12 specifically exempted these things, including California, Florida, and New York. Agustin M. Barbara, a managing partner of the Miami-based firm The Crypto Lawyers, says many of those 32 states “already have the statutory framework in place that would allow for the taxation of NFT sales, even though the statutory language does not explicitly mention NFTs”.

    Federal regulations are more specific.

    There is less doubt at the federal level, as the Internal Revenue Service (IRS) indicated in 2014 that it would treat cryptocurrencies as property, and that any gains would be taxed each time a cryptocurrency owner used it. Furthermore, the 2018 Supreme Court ruling in South Dakota v. Wayfair, which determined that firms without a physical presence in a state that have more than 200 transactions or $100,000 in in-state sales must collect and remit sales taxes, is likely to be applied to NFT sales platforms.

    The IRS is anticipated to provide guidelines for federal taxation of digital assets in the coming months, as part of the Biden administration’s infrastructure package, which was passed last October. This provision compels brokers of digital items, such as sales platforms, to gather purchasers’ and sellers’ physical addresses and social security numbers, and these brokers must submit information returns (1099 forms) that users of their sites would need for completing personal tax returns.

    According to Rosemary Ringwald, national head of art planning at Bank of America’s private banking division, the ability of Washington, or any other state, to enforce sales taxation on NFTs will be dependent on the availability of 1099 forms. “Washington State is blazing a new trail in this, but it is inevitable that other states are going to follow suit.”

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