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Washington and Pennsylvania Lead the Way in NFT Taxation.
Digital assets are notoriously difficult to tax due to the lack of transparency around who owns and trades them. This is especially true for non-fungible tokens (NFTs), which are unique digital assets that can’t be interchangeably exchanged like traditional cryptocurrencies.
Recently, two states have taken steps to change this by becoming the first in the US to explicitly list NFTs as digital assets subject to sales and use taxes. Pennsylvania and Washington’s actions signal a growing understanding of the tax implications of NFTs, as well as a willingness to adapt existing tax laws to this new asset class.
Pennsylvania’s Department of Revenue was the first to act, adding NFTs to its “taxability matrix” in June without providing any accompanying guidance. Washington followed suit in July, publishing an interim statement that proposed a schema for determining the “sourcing” of NFTs (or where, for tax purposes, related transactions physically take place).
The present ecosystem around NFTs is not clear regarding the identities of buyers and sellers, down to where they are located. Additionally, the way NFTs are currently being used – often as unique digital collectibles rather than for utility purposes – means that there is no easy way to value them for tax purposes.
NFTs Taxation Rules
Pennsylvania and Washington’s actions demonstrate a recognition of the need to provide clarity around the taxation of NFTs, even as the asset class itself continues to evolve. As NFTs become more popular and their use cases expand, other states will likely follow suit in clarifying their stance on taxation.
NFT regulation is still in its early days; thus, future changes might occur. The International Revenue Service (IRS) has perceived cryptocurrency as property since 2014; any benefits made from its utilization are subject to duty. As a component of the Infrastructure Investment and Jobs Act marked into law in November 2021, President Biden required new revealing prerequisites for cryptocurrency exchanges that would oblige organizations to gather extra data. The IRS is required to issue further rules for the government assessment of computerized resources to determine how these new arrangements are to be actualized.
For the time being, those engaged with purchasing, selling, or exchanging NFTs should know about the potential assessment ramifications in Pennsylvania and Washington. It is likewise essential to follow any changes at the government level that could affect how NFTs are taxed.