What is Cryptocurrancy and NFTs?

States are just starting to issue sales tax guidance on cryptocurrency and non-fungible tokens (NFTs).  To overly simplify it, cryptocurrency is digital currency that is recorded on a digital ledger (aka the blockchain).  Popular cryptocurrencies are Bitcoin, Ethereum, and Tether.  A non-fungible token (NFT) is a unique identifier that records an asset on the blockchain.  NFTs usually reference digital files such as photos, videos, and audio.  Both cryptocurrencies and NFTs can be bought and sold.

How do States view cryptocurrency?

Since 2014, the Internal Revenue Service has taken the position that cryptocurrency is property for federal income tax purposes.  States, on the other hand, do not see cryptocurrency as property to the extent that the buy and sale of cryptocurrency is subject to sales tax. However, many states, like New York, take the position that when purchasing property in exchange for cryptocurrency, it is a barter transaction.  When obtaining taxable property through a barter transaction, the person acquiring the property still has to remit tax on it.  Other states like Colorado treat cryptocurrency more like cash. Even the Colorado Department of Revenue will accept payment of tax returns with cryptocurrency.

What about NFTs and sales tax?

Many states, on the other hand, view NFTs as digital property.  However, only Pennsylvania and Washington State have released specific guidance in regard to NFTs.  Last year, Pennsylvania “quietly” added NFTs to the list of digital products that are subject to sales tax, providing no further guidance or explanation.

Washington, on the other hand, released a statement specifically discussing NFTs.  If the buyer is purchasing the NFT itself, it is a digital product that is subject to both sales tax and B&O tax.  If the NFT is being purchased with cryptocurrency, the value of the cryptocurrency must be converted to US dollars at the time of the sale. Sales tax is based on the US dollar amount.

Stay updated on Sales Tax!

We expect New York to eventually release sales tax guidance on cryptocurrency and NFTs.  Keep in touch with Sales Tax Defense for any updates!

 

Success Story: An Audit Closed with No Tax Due!

Sales Tax Defense represented a company on its second sales and use tax audit.  The company did both capital improvement work and taxable service.  The State agreed that the company charged sales tax when sales tax was due and no further tax was due on sales.  However, use tax is due on materials used in a capital improvement job.  The auditor needed to determine the amount of materials used in a capital improvement job. To do this, the auditor calculated a capital improvement percentage on sales. The sales tax due was calculated from that percent, applied to purchases.

How did Sales Tax Defense LLC resolve the case?

Sales Tax Defense argued that materials used in capital improvement jobs vs materials used in services is not a 1:1 ratio.  The company does not apply percentages when determining use tax due.  The company goes through each purchase, allocate it to the appropriate job, and then based on the job, calculates whether use tax is due.  This was show to the auditor – allocating each purchase in the test period to a specific job, and thereby proving that no additional use tax is due. The auditor finally agreed with our position.  The auditor was closed as a No Change!