NFT sales are now being subjected to sales taxes
On Jul 1, 2022 Washington state issued an Interim Guidance Statement (IGS) subjecting non-fungible tokens (NFTs) to a 6.5% sales tax and a 0.471% business & occupancy (B&O) tax. Washington is the first state to come up with NFT-specific sales tax guidance and the guidance is already in effect.
Under the guidance, NFT retailers (Individuals who sell NFTs in the course of their business) are required to collect sales taxes from buyers of their NFTs. These sellers are also required to pay the B&O taxes if the sale is attributed to Washington.
Sales tax is a tax imposed on your consumption. When you purchase a good or service from a retailer, the retailer is required to collect the applicable sales tax percentage from you and remit it to the state.
Most states in the US impose sales taxes. The rate could range from 2% to as high as 10% depending on the state and the municipality. Alaska, Delaware, Montana, New Hampshire & Oregon do not have sales tax.
According to the Interim Guidance Statement issued by Washington, an NFT could represent anything including (but not limited to);
a) digital products, such as music, visuals, video works, or video games,
b) admissions to non-retail sales taxable events, such as tickets to clubs, sporting events, or concerts,
c) prepared foods and beverages served by restaurants, or
d) tangible personal property, such as memorabilia, collectibles, or apparel.
Because NFTs can represent anything, Washington state wants to tax NFTs based “on the character of the underlying product (goods and service) included in the sale”
The state is requiring NFT retailers to collect & remit a 6.5% sales tax on NFT sales. Although NFT sellers can collect sales taxes in either cryptocurrency or fiat, they must be remitted to the state in fiat.
For example, Sam is a professional NFT creator residing in Washington. He sells his digital NFT art for 10 ETH (worth $10,000) to George. George also lives in Washington. Total sales tax on the transaction is $650 ($10,000 * 6.5%). Consequently, George now has to pay $10,650 to purchase the digital art. Once the transaction is processed, the retailer, Sam, has to remit $650 to Washington state.
Moreover, since Sam is a retailer located in Washington, he will also be subject to the B&O tax. His $10,000 income sourced to Washington state would now be subject to the 0.471% B&O tax.
(Note that the sales tax collection and remittance is applicable only to individuals involved with selling NFTs in a business setting. If you just sell NFTs occasionally as an investor, you are not generally subject to collecting and remitting sales taxes)
This guidance only addresses NFTs. It will be interesting to see how states think about sales taxes applicable to fungible tokens (coins) which are arguably digital properties.
Washington state also plans to work with external stakeholders to develop more comprehensive and permanent guidance.
However, because over 30 states currently impose sales taxes on digital products such as movies, music, ringtones, and e-book downloads. Arguably, NFTs are already subject to sales taxes under existing rules related to digital products in many states.
Additionally, we will likely see NFT-specific sales tax guidance from other states in the near future influenced by the framework mentioned in Washington state’s guidance.
Although the sales tax guidance is now in place in Washington, the actual enforcement of the rules could be challenging due to the decentralized nature of the crypto space.
According to the notice, “Marketplaces must collect and remit sales or use tax on all taxable retail sales sourced to Washington on behalf of any marketplace seller making retail sales through the marketplace facilitator’s marketplace”. However, marketplaces that allow you to sign up using self-custody wallets (OpeanSea & SupreRare) don’t have access to information to determine the location of buyers and sellers. Actively collecting this information (for sales tax compliance purposes) could negatively affect their growth and public perception.
In addition to facilitating sellers to collect sales taxes from buyers, the marketplace itself is also required to pay B&O taxes.
“If a marketplace takes commissions from retail sales of NFTs that are sourced to Washington, they are subject to service and other activities B&O tax. (RCW 82.04.290.)”
However, If the marketplace is truly decentralized and operated as a DAO by a pseudo-anonymous community of wallet holders, it will be virtually impossible to enforce the rules at the marketplace level.
It should be highlighted that the Interim Guidance Statement should not be applied to all NFT-related transactions. According to the statement, the rules should only be applied to the example fact patterns mentioned in the document. If your situation is different, the state encourages you to request a binding letter ruling to determine your tax obligation.
If you purchased NFTs without paying any sales taxes in the past, there’s not much for you to worry about as a buyer. Generally, the seller has the burden of collecting and remitting sales taxes. If the seller failed to do so in the past when they were required to do so, the state can impose the sales tax bill on the seller. In this case, the unpaid sales tax dollars will have to come out of the seller’s pocket.
Note: Nothing in this report should be considered financial or investment advice.
