Earlier this summer, Washington and Pennsylvania became the first two states to tax the sale of non-fungible tokens, or NFTs. If other states follow their lead, the NFT marketplace, which has relied heavily on anonymity and a lack of government oversite, could face new challenges.
In June, Pennsylvania’s Department of Revenue “quietly” designated NFTs as taxable, though it provided no further instruction, reports Hyperallergic’s Jasmine Liu. Then, in July, Washington’s Department of Revenue released a statement laying out preliminary taxation guidance, which indicates that the state will eventually require sellers to document where purchases take place.
Both states could retroactively collect money related to NFT sales going back several years. The reason, per Hyperallergic, is that the new guidelines are both “[interpretations of] existing law rather than enactments of entirely new legislation.”
NFTs are unreplicable digital files, which can take the form of anything from concert tickets to Twitter profile pictures. (At the moment, they are particularly popular within the art market.) They are a “proof of ownership over a digital item,” Wired’s Eric Ravenscraft writes, which is part of the draw of owning one—the value derives from its exclusivity.
Some NFTs are indeed quite valuable: NFT sales hit $25 billion in 2021, Reuters’ Elizabeth Howcroft reports. In March 2021, the artist Beeple sold one of his NFTs for $69 million. Earlier this year, the artist Pak sold his NFT artwork, titled Clock, for over $52 million.
NFTs have always had detractors, who denounce them as get-rich-quick schemes, among other criticisms. And the 2022 cryptocurrency market isn’t booming the way it did in 2021. Still, where money can be made, money can be taxed—and state revenue officials are taking notice, New York lawyer Amelia K. Brankov tells the Art Newspaper’s Daniel Grant.
Another defining feature of NFTs is the baked-in anonymity. NFT transactions occur on the blockchain, which allows people to buy and sell without being traced. This feature will complicate how NFTs are taxed in Washington and Pennsylvania, explains Artforum, since many transactions occur between unidentified buyers and sellers in unknown locations.
“Previously, sellers and buyers of NFTs weren’t evading taxes—they were merely enjoying the lack of regulations,” writes ARTnews’ Shanti Escalante-De Mattei. “Whether people are willing to explicitly evade taxes is a different matter entirely.”