Pennsylvania and Washington become the first US states to tax NFTs
In June and July, Pennsylvania and Washington quietly became the first two states in the nation to explicitly list non-fungible tokens (NFTs) as digital assets subject to sales and use taxes. While Pennsylvania’s Department of Revenue inaugurated the change by adding NFTs to its “tax liability matrix” without providing any accompanying guidance, Washington published an interim statement with definitions of key terms and a proposed form for determining the “source” of NFTs, or where , for tax purposes, related transactionpp physically take place.
The main complication of taxing NFTs is that the current ecosystem is notoriously unclear about the identity of buyers and sellers, down to their location. Also, some states currently recognize that NFTs may be taxable (even if they have not formally listed them yet) while others do not.
The administration of sales taxes has been confusing for state regulators since the dawn of e-commerce, confronting them with unprecedented questions about how to treat Internet sales. A key Supreme Court case in 2018, South Dakota v. Wayfair, changed the state taxation landscape for digital transactions by determining that sellers did not have to have a physical presence in a given state where buyers receive goods to impose sales tax, once they achieve a certain volume of transactions. Apparently, according to the logic of that case, NFT vendors should be held to the same standard and are obligated to collect sales taxes when doing business with customers in states that tax digital assets.
Federally, tax rules surrounding NFTs are also incomplete. The Internal Revenue Service (IRS) has recognized cryptocurrency as property since 2014; any profit from the use is taxable. As part of the Infrastructure Investment and Jobs Act signed into law in November 2021, President Biden imposed new reporting requirements for cryptocurrency transactions that would require businesses to collect additional information. The IRS will issue additional guidance on the federal taxation of digital assets to specify how these new provisions will be implemented.
Both Pennsylvania’s and Washington’s actions surrounding the taxation of NFTs are guidelines that interpret existing law rather than enactment of entirely new legislation. That means they can be used retroactively, with a spokesperson for the Pennsylvania Department of Revenue stating that they had the power to collect taxes on NFTs going back to 2016.
Washington’s more comprehensive statement suggests that NFT sellers will be expected to document the time and place of each transaction, and possibly the addresses of the buyers. It defines NFTs, lays out the types of NFTs that are taxable, outlines how a supplier will tabulate its tax liability, and outlines how suppliers can buy the sale. The last element is the most ambiguous; currently, few vendors or marketplace platforms track who buyers are and where they are located because these transactions use cryptocurrency. Some experts believe that new rules like Washington’s will change industry practices by reducing the anonymity that currently prevails in NFT sales.
Washington’s statement does not constitute permanent guidance, and the IRS continues to seek feedback as it develops one.
