A non-fungible token (NFT) is a unique digital title (token) to real or virtual property stored on a blockchain ledger. It is used as a medium to invest in art, music, media, trading cards and other items. Some feel it should be considered a non-tangible asset. Unlike Bitcoin, NFTs represent a unique digital assets that can’t be traded one for one like Bitcoin. Each NFT has its own unique value depending on the underlying asset.

So, are NFTs subject to sales tax? To date, no state has expressly indicated that NFTs are or are not subject to sales tax. However, there are 32 states that impose sales tax on digital products, including digital artwork, photography, videos and music downloads, because their state statutes consider these digital downloads as tangible personal property.

Some of these state statutes appear as if they would already include NFTs as tangible personal property, which would make them subject to sales tax. This is especially true in cases where the art is sold by a gallery or dealer to collectors.

State tax authorities have often had to adapt to changes in technology to avoid the erosion of their tax bases. This was true with the advent and use of Voice Over IP (VoIP), which doesn’t use traditional telephone lines to transmit voice communication. When states began to impose sales tax on this technology, taxpayers argued that their state statutes as written didn’t apply to VoIP.

This was also the case with software downloads and digital artwork, which are historically transferred in tangible format. Some states had to update their statutes to enable them to tax these new electronic variations, while other states were able to incorporate the new products within their existing statutes.

As digital assets recorded using blockchain technology, NFTs are intangible and therefore should not be subject to sales tax in states that do not tax digital goods, including New York. However, given the surge of crypto transactions involving NFTs, it’s just a matter of time before the states take action.

Therefore, sellers, especially, should stay apprised of the sales tax laws and how they might apply to NFTs in states where they do business. Sales tax is intended to be borne by customers but can easily become an expense of the seller if it is not collected. In states that broadly impose sales tax on digital products, there is the potential risk of retroactive application of sales tax on NFTs because these states can assume the position that NFTs were taxable all along.

Buyer, on the other hand, should be aware of the use tax laws, since they are required to self-assess use tax on sales taxable purchases if the sales tax was not collected by the seller. Collectibles such as artwork are high targets for use tax audits.

To avoid negative retroactive tax implications, we recommend consulting with your sales tax advisor who can assist you in working with the respective states to gain clarity and reach agreement on resolution of prior exposure and prospective compliance.

To learn more, you can read Amy Wall’s article “NFTs are Nifty” in the latest edition of NATP’s TAXPRO Journal. Amy takes a deeper look at the concept of NFTs, along with the tax implications and laws involving them.

If you’re interested in learning more about cryptocurrency, NFTs and the Cryptoverse, or looking for more guidance about the tax implications, we encourage you to attend our upcoming online training Basics and Beyond of Cryptocurrency Taxes.