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Cryptocurrencies

Cryptocurrencies

Sales Taxes Apply to NFT Purchases

Sales Taxes Apply to NFT Purchases
Photo by Karolina Grabowska/board on top of cash bills Photo by Karolina Grabowska/board on top of cash bills
Sales Taxes Apply to NFT Purchases
Photo by Karolina Grabowska/board on top of cash bills Photo by Karolina Grabowska/board on top of cash bills

Washington State published an Interim Guidance Statement (IGS) on July 1, 2022, imposing a 6.5 percent sales taxes and a 0.471 percent business & occupancy (B&O) tax on non-fungible tokens (NFTs). The first state to develop NFT-specific sales taxes guidelines is Washington, and the guidance is currently in place.

NFT merchants, or those who sell NFTs as part of their company, are mandated by the guidelines to collect sales taxes from customers. If the sale is considered to have occurred in Washington, these sellers must additionally pay B&O taxes.

Sales Taxes

A charge on your consumption is the sales tax. A business is expected to collect the appropriate sales tax percentage from you when you buy an item or service from them and to send it to the state.

The majority of US states apply sales taxes. Depending on the state and the municipality, the rate may be between 2 and 10 percent. There is no sales tax in Alaska, Delaware, Montana, New Hampshire, or Oregon.

6.5% NFT sales Tax in Washington

The Interim Guidance Statement released by Washington states that anything might be represented by an NFT, including but not limited to;

  • digital products, such as video games, graphic arts, and music,
  • entry fees to taxable non-retail activities, such as club memberships, sports tickets, or concert tickets
  • prepared meals and drinks offered by restaurants, or 
  • physical items like clothing, keepsakes, or mementos.

Washington State seeks to tax NFTs based “on the character of the underlying commodity (goods and service) included in the transaction” since NFTs may represent anything.

The state requires retailers of NFT products to collect and return a 6.5 percent sales taxes on NFT sales. Regardless of whether they are paid in cryptocurrency or fiat, sales taxes must be paid to the state via fiat, according to NFT vendors.

For instance, Joe is a Washington resident and a professional NFT developer. He offers George $10,000 in exchange for 10 ETH of his digital NFT artwork. George resides in Washington as well. The total sales tax for the deal is $650 ($10,000 * 6.5%). George must now spend $10,650 to buy the digital work as a result. Sam, the retailer, is required to send $650 to Washington state after the transaction has been finalized.

Joe will also be liable for the B&O tax because he has a store in Washington. As a result, his $10,000 in revenue from Washington would now be liable to the B&O tax at a rate of 0.471 percent.

(Take note that only those participating in the sale of NFTs in a commercial context are subject to the collection and payment of sales taxes. As an investor, you are exempted from collecting and remitting sales taxes if you only infrequently sell NFTs.)

This information only applies to NFTs. However, it will be fascinating to watch how different governments see the application of sales taxes on fungible tokens (coins), which are presumably digital assets.

Outlook and Implications

Coming Nationwide?

Washington State also intends to collaborate with other partners to create permanent and more thorough guidance.

However, digital goods like movies, music, ringtones, and e-book downloads are now subject to sales taxes in over 30 states. NFTs may already be liable to sales taxes under many jurisdictions’ current laws governing digital goods.

Furthermore, the approach outlined in Washington State’s guidance will probably impact NFT-specific sales tax guidance from other jurisdictions in the near future.

FT Sales Tax Enforcement Challenges

Despite the fact that Washington has finally adopted the sales tax advice, the decentralized structure of the cryptocurrency industry may make it difficult to really implement the regulations.

The notice states, “Marketplaces should, on behalf of any Marketplace Seller conducting Retail Sales through the Marketplace Facilitator’s Marketplace, collect and remit Sales or Use Tax on all taxable Retail Sales Sourced to Washington.” However, marketplaces that let you join up using self-custody wallets (OpeanSea & SupreRare) lack the data necessary to pinpoint where buyers and sellers are located. Actively gathering this data (for sales tax compliance considerations) might harm their development and public image.

The marketplace itself must pay B&O taxes in addition to helping vendors collect sales taxes from customers.

“Service and other activities B&O tax is applicable if a marketplace receives commissions from retail sales of NFTs that are sourced to Washington (RCW 82.04.290.)”

However, it will be almost hard to enforce the regulations at the marketplace level if the market is genuinely decentralized and run as a DAO by a fictitious community of wallet owners.

It should be made clear that not all NFT-related transactions should follow the Interim Guidance Statement. The assertion claims should only use the rule with the example fact patterns given in the text. The state advises you to ask for a written judgment to evaluate your tax liability if your circumstances differ.

What Next?

There’s not much to worry about as a buyer if you previously bought NFTs without paying any sales taxes. Sales taxes are typically collected and submitted by the vendor. However, the state may charge the seller for the sales tax if the seller did not pay it when they were in the past. In this instance, the seller will pay the unpaid sales tax.

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