NFT purchases are now subject to sales tax
On July 1, 2022, the State of Washington issued a Interim Statement of Guidance (IGS) subjecting Non-Fungible Tokens (NFTs) to a 6.5% sales tax and a 0.471% Activities and Occupancy (B&O) tax. washington is the first State to propose NFT-specific sales tax guidelines and guidelines are already indeed.
According to the guidelines, NFT retailers (people who sell NFTs as part of their business) are required to collect sales taxes from buyers of their NFTs. These sellers are also required to pay B&O taxes if the sale is attributed to Washington.
What are sales taxes?
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 US states impose sales taxes. The rate can range from 2% to 10% depending on the state and municipality. Alaska, Delaware, Montana, New Hampshire and Oregon have no sales tax.
6.5% NFT sales tax in Washington
According to the draft guidance statement issued by Washington, an NFT could represent anything, including (but not limited to);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 taxable events other than retail sales, such as tickets to clubs, sporting events or concerts,
(c) prepared foods and beverages served by restaurants, or
(d) tangible personal property, such as souvenirs, collectibles or clothing.
Because NFTs can represent anything, Washington State wants to tax NFTs based on “the character of the underlying product (goods and services) included in the sale”
The state requires NFT retailers to collect and remit a 6.5% sales tax on NFT sales. Although NFT sellers can collect sales tax in cryptocurrency or fiat, it must be remitted to the state in fiat.
For example, Sam is a professional NFT creator residing in Washington. He sells his NFT digital art for 10 ETH (worth $10,000) to George. George also lives in Washington. The total sales tax on the transaction is $650 ($10,000 * 6.5%). Therefore, George must now pay $10,650 to purchase the digital art. After the transaction is processed, the retailer, Sam, must remit $650 to Washington State.
Also, since Sam is a retailer located in Washington, he will also be subject to the B&O tax. His income of $10,000 from Washington State would now be subject to the 0.471% B&O tax.
(Note that the collection and remittance of sales tax only applies to persons involved in the sale of NFTs as part of a business. If you occasionally sell NFTs as an investor, you do not are generally not subject to the collection and remittance of sales taxes)
This guide is only about NFTs. It will be interesting to see how states think about sales taxes on fungible tokens (coins) that are arguably digital properties.
Prospects and implications
Washington State also plans to work with external stakeholders to develop more comprehensive and permanent guidelines.
However, because more than 30 states currently impose sales taxes on digital goods such as movies, music, ringtones, and e-book downloads. Arguably, NFTs are already subject to sales taxes under existing digital goods rules in many states.
Additionally, we will likely see other state NFT-specific sales tax guidelines in the near future influenced by the framework mentioned in the Washington State guidelines.
FT Sales Tax Enforcement Challenges
Although sales tax guidelines are now in place in Washington, actually enforcing the rules could be difficult due to the decentralized nature of the crypto space.
According to the notice, “Marketplaces to have to collect and remit sales or use tax on all taxable retail sales originating in Washington on behalf of any Marketplace Vendor making retail sales through the Marketplace Facilitator’s Marketplace”. However, marketplaces that allow you to register using self-service wallets (OpeanSea and SupreRare) do not 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 allowing sellers to collect sales taxes from buyers, the marketplace itself is also required to pay B&O taxes.
“If a market takes commissions on retail sales of NFTs originating in Washington, they are subject to the B&O tax on services and other activities. (RCW 82.04.290.)”
However, if the market is truly decentralized and operated like a DAO by a pseudo-anonymous community of wallet holders, it will be nearly impossible to enforce the rules at the market level.
It should be emphasized that the draft guidance statement should not be applied to everything Transactions related to NFTs. According to the statement, the rules should only be applied to the example patterns of facts mentioned in the document. If your situation is different, the state encourages you to request a binding decision letter to determine your tax liability.
If you’ve bought NFTs without paying sales tax in the past, you don’t have to worry about anything as a buyer. Generally, the seller has the burden of collecting and remitting sales taxes. If the seller has not done so in the past when required to do so, the state may 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.
- Speak to a qualified state and local tax advisor to see if your NFT business is subject to the collection and remittance of sales taxes.
Note: Nothing in this report should be taken as financial or investment advice.