The Taxation of NFTs by the State of Washington

The state of Washington, as well as many other states in the United States, is vast in NFTs, cryptocurrency and digital assets in general. Washington have provided brief guidance on how NFTs are taxed and the kind of tax they are subject to, in contrast to many other states and even at the federal level as they are yet to provide guidance on how NFTs will be handled.

What is an NFT?

NFT is the acronym for Non-Fungible Tokens. NFT is a unique digital identifier that cannot be copied, subdivided or substituted. It is recorded in a blockchain and used to certify ownership and authenticity. Notably, NFT is not a cryptocurrency, which is fungible. Similarly, cryptocurrency is not an NFT.

Washington Guidance

Washington is one of the few states to address the taxability of NFTs. Defining NFT is necessary. In fact, it is the first step in determining whether it is taxable or not. Trading NFTs means you can receive digital products and services using NFTs, in this case, you can receive artwork, music, video games, admission to a club, foods and beverages, as well as tangible personal properties with an NFT. All these are important in determining how NFTs will be taxed. NFTs, can provide one or multiple of these items.

Example

There is a company that has a golf club and a country club. They sell their membership with NFTs. In other words, they use NFTs for their admission into their golf club and country club. There are also private dining clubs that sell membership through NFTs. Owning these NFTs will give access to the country club or private dining clubs.

Biggest Tax Question

One of the biggest questions that arise with the taxability of NFTs is “Is an NFT subject to sales tax?” proper guidance or answers have not been provided in this area. It all depends on what the buyer gets.

1. If the purchaser only receives the NFT with no additional item, sales tax applies to it in the state of Washington. The seller is also subject to business and occupational tax in this state.
2. If you receive a good or service from the purchase of an NFT, not to include the NFT itself, sales tax may also applies.
3. If the object of purchase from the NFT is not classified as a retail sale, sales tax does not apply. However, it could be subject to the business and occupational tax in the state of Washington.
4. The sale of NFT could include royalties. When an NFT is resold, the original creator of the NFT receives royalties. Now, these royalties are not subject to sales taxes but to the business and occupational tax in Washington.

Which state sale tax to charge?

Is it the state tax of the state the seller or the purchaser currently is? Or are other factors contributing? in most cases, it is destination sourcing. This means the rules for determining sales tax are based on the destination where the item is taken. For instance, if you purchase an item online and take it in Washington, the state of Washington determines the sales tax. This means you will be charged sales tax based on the state of Washington.

Finally, there is the origin sourcing rule. in this case, the sales tax is determined in the state where the sale is made. Here, if an item is sold in California to an individual in Washington, the sales tax is determined by the state of California.

This is very important in determining how to charge sales tax for the sales of NFTs. Washington is the only state that has provided guidance to this degree on how to go about this. To this end, I recommend you discuss this with your financial and tax advisor, and if you have a crypto advisor, don’t hesitate to discuss it with them.