Pennsylvania and Washington State earlier this summer became the first two US states to officially cite NFTs, or nonfungible tokens, as digital assets subject to sales and use taxes, Hyperallergic reports. The Pennsylvania Department of Revenue simply listed them as taxable but did not offer guidance on the matter, while Washington provided an interim statement containing definitions of key terms and a proposed plan for arbitrating exactly where, for tax purposes, transactions related to the sale of NFTs physically take place. Because both states imposed the tax by interpreting existing law rather than enacting new legislation, they have the power to retroactively collect monies due—in the case of Pennsylvania, as far back as 2016.
Complicating the process of taxing NFTs is the inscrutability that typically attends such sales, in which the identities of the buyers and sellers are often unknown, as are their locations. If other states follow in the footsteps of Pennsylvania and Washington, however, such anonymity could become a thing of the past. The taxation of NFTs by states was made possible by the 2018 Supreme Court case South Dakota v. Wayfair, in which the court ruled that sellers participating in a certain number of transactions did not have to have a physical presence in the states in which the buyers of their goods lived in order to impose taxes on sales. According to that logic, the sellers of NFTs are obligated to collect sales taxes when conducting business with buyers in states that tax digital assets.
Federal rules in regard to the taxation of NFTs are nebulous. The Internal Revenue Service since 2014 has recognized cryptocurrency as taxable property, and President Joe Biden last November as part of his $1.2 trillion infrastructure bill called digital currency brokers to supply yearly tax reporting beginning in January 2023. The IRS is expected to issue further guidelines regarding the matter.
