In July, Washington state added NFTs to the list of properties subject to its sales and use tax provisions, making it the first American state to do so—though it is far from the last.
Sales taxes apply to all goods and services purchased by consumers and businesses. In contrast, 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 volume of NFT sales in the US and globally is unknown, but the blockchain tracking company NonFungible.com estimated $17 billion in NFT transactions globally in 2021.
“In recent years, states have seen NFT prices skyrocket,” says Amelia K. Brankov, a New York lawyer. That money piques revenue officials’ interest, and “some states are focusing on the taxability of NFT sales.” The sales tax in Washington is 6.5%, but that may be the only thing that is certain about this process.
Uncertainty about where NFTs are “sourced” complicates taxation, which can be a tricky question with an NFT sale, typically conducted through 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 inconsistent. The buyer may be held liable if a marketplace does not collect the tax.
Washington is far from being the last state to tax NFTs
Aside from that, some states consider digital products like NFTs to be taxable, while others do not, making determining whether or not taxes are owed difficult. At the time of publication, 32 states, including Pennsylvania, Texas, and Washington, permitted the taxation of digital products, while 12 specifically exempted these items, including California, Florida, and New York.
Many of those 32 states, according to Agustin M. Barbara, managing partner of the Miami-based firm The Crypto Lawyers, “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.”