Two states recently became the first in the US to officially classify NFT as digital assets that are subject to sales and use taxes.
The actions of Pennsylvania and Washington show a growing knowledge of the tax ramifications of NFT and a willingness to modify current tax laws to account for this new asset class.
The lack of transparency surrounding who owns and trades digital assets makes them famously challenging to tax. This is particularly true of non-fungible tokens (NFTs), which are distinct digital assets that cannot be traded interchangeably like conventional cryptocurrencies.
The first agency to take action was Pennsylvania’s Department of Revenue, which added NFTs to its “taxability matrix” in June without offering any more instructions. Washington adopted a similar strategy in July, releasing an interim report that recommended a framework for identifying the “source” of NFTs (or where, for tax purposes, related transactions physically take place).
The current environment surrounding NFTs is unclear as to who the buyers and sellers are and where they are located. Additionally, there is no simple way to value NFTs for tax purposes due to the way they are being used, which is frequently as one-of-a-kind digital collectibles rather than for utility purposes.
NFT Tax Regulations
Even as the asset class itself continues to develop, Pennsylvania and Washington’s actions show a realization of the need to offer clarity around the taxation of NFTs. Other states will probably follow suit in outlining their taxation policies as NFT gain popularity and their use cases broaden.
Since NFT regulation is still in its infancy, revisions in the future are possible. Since 2014, the International Revenue Service (IRS) has regarded cryptocurrencies as property; any gains derived from their use are liable to tax. President Biden demanded new revealing requirements for bitcoin exchanges as part of the Infrastructure Investment and Jobs Act, which was signed into law in November 2021 and would compel firms to collect more data. Further regulations for the government’s assessment of electronic resources must be issued by the IRS before these new arrangements can be put into practice.
For the time being, anybody involved in buying, selling, or exchanging NFT should be aware of the possible assessment repercussions in Washington and Pennsylvania. Keeping up with any governmental changes that can have an impact on how NFTs are taxed is also crucial.
