States Move to Tax Cryptocurrencies and Non-Fungible Tokens (NFTs) | Cadwalader, Wickersham & Taft LLP

As the IRS considers its approach to taxing cryptocurrencies and NFTs, states are increasingly imposing taxes on certain digital asset transactions, including the use of cryptocurrencies, as shown below. – below:

  • New York announces apportionment rules to treat cryptocurrency sales as digital commodities and tax them accordingly. The New York State Department of Tax and Finance has issued draft guidance, included here, expanding the allocation rules for digital products to include cryptocurrency or similar assets delivered digitally, and in doing so clarified that the rules for obtaining proceeds from the sale of cryptocurrency must follow them for digital assets for New York State tax purposes.
  • New Jersey will tax virtual currency transactions for goods and services under sales tax and is exploring ways to identify additional transactions that are taxable, but will not impose sales tax on virtual currencies purchased for investment purposes. The New Jersey Division of Taxation said it is creating a task force to better identify cryptocurrency transactions subject to sales tax and is considering policies for sharing information with the IRS and other states. The Taxation Division previously issued a Technical Advisory Memorandum (TAM) in March, which is included here, stating that purchases of virtual currencies for investment purposes are not subject to VAT; in contrast, purchases of taxable goods or services with virtual currencies are subject to sales tax as well as the seller’s bookkeeping requirements. TAM further stated that for corporate and gross income tax purposes, New Jersey would follow the federal tax treatment of virtual currency.
  • Washington will tax sellers, buyers and marketplaces of NFTs under its sales tax and business tax regimes in accordance with recently issued guidelines. The Washington Department of Revenue has issued an Interim Guidance Statement (IGS) clarifying the tax treatment of transactions involving NFTs for sales tax as well as business and professional tax purposes. IGS affects sellers, buyers and NFT markets where sales originate in Washington. The IGS includes measures to calculate the selling price of NFTs, including when cryptocurrency is received as consideration, obligations for sellers and NFT marketplaces to keep records, consequences for mixed transactions where NFTs are bundled with other goods and services, and requirements to NFT marketplaces to collect and pay VAT on behalf of its sellers. IGS can be found here.
  • Arizona excludes airdrops from gross income and allows a deduction for certain transaction fees paid on cryptocurrency and NFTs. Recently passed legislation in Arizona, included here, provides that virtual currency and NFTs received in an airdrop are not taxable at the time of the airdrop, but are taxable upon subsequent sale. Airdrops are a way to distribute cryptocurrency to the distributed ledgers of multiple taxpayers. The legislation further allows taxpayers to deduct from virtual currency or NFT adjusted gross income “gas fees,” which are facilitation fees paid to virtual networks for the purchase, sale or exchange of currencies, virtual or NFT. The deduction applies to years in which the taxpayer has recognized a gain or loss on virtual currencies or NFTs, and otherwise has not included the gas expense in the basis. Arizona’s law contrasts with US federal tax law and Rev. Rule. 2019-24, where the IRS treated cryptocurrency received as a result of an airdrop after a hard-fork as taxable upon receipt. See our earlier BrassTax article here for a discussion of previous IRS advice on airdrops.

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