States turning eyes on taxation of cryptocurrency and non-fungible tokens (NFTs) | Cadwalader, Wickersham & Taft LLP

As the IRS considers its approach to taxing cryptocurrencies and NFTs, states are increasingly imposing taxes on certain digital asset transactions, including the use of cryptocurrencies, as discussed below:

• New York announces apportionment rules to treat cryptocurrency sales as digital products and taxes accordingly. The New York State Department of Taxation and Finance published draft guidance, included here, expanding the distribution rules for digital products to include cryptocurrency or similar assets digitally delivered, thereby clarifying that the source of income rules from the sale of cryptocurrency should be followed. those for digital assets for New York State tax purposes.
• New Jersey will tax virtual currency transactions for goods and services under sales tax and is studying ways to identify additional transactions subject to sales tax, but will not impose sales tax on virtual currencies purchased for investment. New Jersey’s Department of Revenue indicated it is creating a task force to better identify cryptocurrency transactions subject to sales tax, and is considering guidelines for information sharing with the IRS and other states. The tax department previously issued a technical advice memorandum (TAM), included here, in March that purchases of virtual currencies for investment purposes are not subject to sales tax; on the other hand, purchases of taxable goods or services with virtual currencies are subject to sales tax as well as requirements for accounting from the seller. TAM further indicated that for corporate and gross income tax purposes, New Jersey will follow the federal tax treatment of virtual currency.
• Washington will tax sellers, buyers and marketplaces of NFTs under its sales tax and business and professional tax regimes according to recently published guidance. The Washington Department of Revenue issued an Interim Guidance Statement (IGS) clarifying the tax treatment of transactions involving NFTs for sales tax as well as business and professional tax purposes. The IGS affects sellers, buyers and NFT marketplaces where the sale originates in Washington. Included in the IGS are measures to calculate the selling price of NFTs, including where cryptocurrency is received as consideration, obligations for sellers and NFT marketplaces to maintain records, implications for mixed transactions where NFTs are bundled with other goods and services, and requirements for NFT marketplaces to collect and pay VAT on behalf of their sellers. IGS can be found here.
• Arizona carves out airdrops from gross income and allows deductions for certain transaction fees paid on cryptocurrency and NFTs. Arizona’s recently enacted legislation, included here, provides that virtual currency and NFTs received pursuant to an airdrop are not taxable at the time of the airdrop, but are taxable upon subsequent sale. Airdrops are a means of distributing cryptocurrency to the distributed ledgers of multiple taxpayers. The legislation further allows taxpayers to deduct adjusted gross income on virtual currencies or NFTs, so-called “gas fees”, which are facilitation fees paid to virtual networks for the purchase, sale or exchange of virtual currencies or NFTs. The deduction applies to years in which the taxpayer recognized a gain or loss on virtual currencies or NFTs, and otherwise did not include gas taxes in the basis. Arizona’s legislation contrasts with US federal tax law and Rev. Roll. 2019-24, where the tax authorities treated cryptocurrency received pursuant to an airdrop after a hard-fork as taxable at the time of receipt. See our earlier BrassTax article here for a discussion of previous IRS guidance on airdrops.