Washington became the first US state to tax NFTs, the state government announced this past July.
The regulations are complicated, and enforcing them may be harder still. Tax agencies may have a difficult time determining whether the sales of digital, decentralized, placeless products like NFTs actually took place in Washington.
The tax regulations assume that sellers of NFTs know where in the world their customer is based, though that is often not the case.
Experts at Greenberg Traurig law firm wrote that if the seller cannot verify the location of their customer, the burden of the source’s transaction will fall on the location of the seller’s server. And if that server is in Washington state, they seller will be obligated to pay taxes on the transaction.
In the age of VPNs, which disguise one’s server location, this may seem like an easy problem to skirt. But government agencies are catching up to these technological evasions. The Treasury Department sanctioned Tornado Crash, a service that made Ethereum transactions untraceable, in August.
Previously, sellers and buyers of NFTs weren’t evading taxes—they were merely enjoying the lack of regulations. Whether people are willing to explicitly evade taxes is a different matter entirely, even if it is possible given the anonymity and evasions made possible with blockchain technologies.
The Washington guidelines also address the issue of ascertaining the taxable value of one’s NFT, given fluctuations in cryptocurrency value.
“If a seller receives cryptocurrency in exchange for an NFT, the value of the cryptocurrency tendered must be converted to US dollars as of the time of the sale,” the regulations state.
NFT marketplaces are also implicated in these new tax regulations.
“Marketplaces must collect and remit sales or use tax on all taxable retail sales sourced to Washington on behalf of any marketplace seller making retail sales through the marketplace facilitator’s marketplace,” according to the regulations.
As crypto-journalist Will Gottsegen pointed out in a recent article for the Atlantic, emerging regulations for cryptocurrencies and NFTs flout the myth that these decentralized technologies are capable of delivering on their utopian goals.
“If [American crypto-companies] choose to comply with the sanctions, they’re conceding that governments can meddle in transactions after all,” Gottsegen wrote. “If they don’t, they risk violating Treasury Department guidelines—a move that’s not particularly sustainable for a growing industry.”