NFTs Are a Mixed Bag

Non-fungible tokens (NFTs) have been an increasingly popular feature of the virtual world. These unique, one-of-a-kind digital assets are bought and sold on a blockchain and include things such as video clips, digital art and music, or even tweets. As digital markers they’re used to represent the value of a tangible asset. Some are selling for millions of dollars.

State and federal governments see these transactions as missed opportunities to bring in tax revenue.

What Tax Category?

The diverse nature of NFTs has left accountants and government officials scratching their heads over the terms of taxation. Further complicating the issue is the nontraditional way in which they are sold, often via auction, with prices set in cryptocurrency. The fact that blockchain transactions are anonymous only makes applying a uniform standard more difficult.

Another issue is whether NFTs are an appreciable asset that should be subject to capital gains taxes. Perhaps they should be viewed as a product with an accompanying sales tax. With some NFTs entirely digital and others tied to physical assets, having a uniform tax standard is a challenge.

Puerto Rico and Washington: Tax Pioneers

Puerto Rico and Washington state are attempting to set a taxation standard for NFTs. Agencies of both governments contend that the assets should be subject to sales taxes.

Washington state also has indicated that use, business, and occupation taxes may apply as well. The state declined to disclose guidance on the potential applicability of capital gains taxes. Meanwhile, the IRS has been conspicuously silent on the topic.

For those that trade in the NFT marketplace, the downstream tax effect may continue to be a mystery for some time.

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