The taxation of non-fungible tokens, or NFTs, has been a trending topic in recent years. A non-fungible token, simply described, is a digital identifier recorded in the blockchain. NFT is used to give ownership of a product that cannot be copied.
Since the emergence of this type of digital assets and their oftentimes costly acquisitions, their sales tax status has been under heated discussions. The most recent decision on NFT taxation was made in Wisconsin, with the state becoming the fifth jurisdiction in the U.S. to issue official guidance on the NFT sales tax.
The guidance is part of the periodic Wisconsin “Tax Bulletin,” which overviews newly imposed laws, rulings, and litigation decisions on tax topics. The most recent edition touches upon the question of NFTs.
In the bulletin, it is said that the acquisition of an NFT may be taxable in cases when the product, good, or service, underlying the NFT is taxable in the state.
For example, if an NFT allows the buyer to download music or movies, the NFT is then considered to be a sale of a digital good. If an NFT is linked to admission to a sports event, it’s taxable. If the NFT comes along as a tangible piece of art, it is then considered a sale of personal property.
Similar decisions were made in Minnesota, Pennsylvania, and Puerto Rico. So, it is a general trend to judge the NFT taxation status based on the underlying assets the specific NFTs represent. However, the most detailed guidance on the topic was issued in Washington, with a special theory of taxation and the compliance challenges it entails. Even though Washington’s taxation authorities admit there are a number of compliance and other obstacles related to the sales of NFTs, the institution specified that sales tax should be collected in all cases when the NFT represents taxable assets.
NFT taxation remains a challenge for tax authorities, with a uniform guide needed to inform state authorities about the most common issues to be addressed. It is essential to initiate such guidance as soon as possible, as the current NFT sellers are experiencing compliance questions in real time.
If you have further questions on the taxation of NFTs or other digital assets, reach out to our specialists at 1stopVAT, and we will help you.