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NFT Sales Taxes (2023 IRS Rules)
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Some states tax NFTs and other digital sales products, while others do not.
Businesses that exceed $100,000 in sales or 200 transactions in a given state are responsible for collecting sales tax in that state, regardless of whether or not they have a physical presence there.
NFT marketplaces such as OpenSea do not source or collect sales tax, so individual sellers must independently calculate and collect the required state sales tax.
Typically, when we think of crypto taxes, we think of capital gains or income taxes, not sales taxes. Traditionally, only “tangible personal property” was eligible for sales tax; of course, the introduction of digital products complicated this rule. Currently, there isn’t uniformity in how states have responded: some states tax digital products that can be "seen and experienced" and some don't.
Are NFTs taxed?
States typically include products like audio and video files, ebooks, and computer games in their lists of taxable digital items. Fungible crypto tokens like Bitcoin or Ethereum don’t fall into these categories, so most state sales tax experts agree they wouldn’t be subject to state sales tax.
However, NFTs (non-fungible tokens) are a trickier problem. One could argue that many NFTs, particularly collectible ones, can indeed be “seen or experienced.” You can see and display a PFP like a Bored Ape, you can use an Axie NFT in a blockchain game, and some NFTs are even tied to physical objects.
This reality has led some states to explicitly address sales tax on NFTs. In 2022, Pennsylvania and Washington both added NFTs to their list of taxable digital products.Puerto Rico has announced that it is also investigating a sales tax for NFTs.
When do state sales tax apply to NFTs?
Because NFTs are sold on online marketplaces like OpenSea or Rarible, one might jump to the conclusion that even if the buyer is located in a state with NFT sales tax, it wouldn’t be applied to their purchase unless the seller was physically located in one as well. However, this isn’t the case.
In Wayfair vs. South Dakota (2018), the Supreme Court ruled that businesses that conduct more than 200 transactions or make $100,000 or more of sales in a state are responsible for collecting sales tax in that state, regardless of whether or not they have a physical presence there.
Many NFT projects could easily meet or exceed these trading levels. For example, if an NFT artist based in Brooklyn sold $101,000 worth of NFTs in Pennsylvania, she would be responsible for collecting and remitting Pennsylvania state sales tax on those transactions. Typically, to comply with these laws, online sellers use a marketplace that has a sales tax calculator built in, such as Amazon or Etsy.
However, NFT marketplaces are not yet offering such services. This complicates matters for NFT sellers who meet the Wayfair vs. South Dakota thresholds. They depend on NFT marketplaces such as OpenSea to reach their buyer audience, but, because these services don’t source and collect sales tax, the individual sellers would need to independently calculate and collect the required state sales tax.
How do I source NFT transactions for sales tax?
Currently, Washington's guidance on the topic is the most illuminating. As a member of Streamlined Sales Tax (SST), a set of 44 states that has agreed to a standardized set of sales tax definitions, Washington recommends following the SST sourcing hierarchy in order to determine which NFT transactions should receive state sales taxes. However, this hierarchy does not specifically take NFTs into account, so procedures may change as the SST releases further guidance.
The bottom line is this: Washington, Pennsylvania, and Puerto Rico have introduced or plan to introduce NFT sales taxes and other states are likely to follow suit. However, specifics still remain unclear, especially around sourcing. If you sell NFTs to buyers in those states, particularly if you meet the Wayfair transaction thresholds, we recommend speaking to an accountant or attorney with expertise in digital product sales tax.
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Last reviewed by Tynisa (Ty) Gaines,EA on September 13, 2023 · Sources