27/02/2023
Patrick Camuso, CPA
12/01/2023
Non-fungible tokens, or NFTs, have become increasingly popular over the past few years to authenticate digital ownership of artwork, music, videos, and other digital assets. This has led to an increase in the sale of these items, which comes with some unique Web3 NFT sales taxes requirements that must be considered. As such, it is essential to understand what NFT sales tax is, when they apply, and strategies for collecting and filing associated taxes.
Are you an NFT artist or seller? Brace yourself, as sales taxes may apply to every NFT sale. However, the shocking truth is that very few are actually collecting and remitting these taxes.
One of the biggest questions we get (after do I have to pay NFT sales tax?) is: how do I collect NFT sales taxes? This article will provide a comprehensive guide on paying taxes on NFT sales and the potential risks of not doing so. We’ll also look at tips for collecting NFT sales taxes from customers at checkout, filing NFT sale taxes properly, and avoiding possible penalties down the line due to lack of compliance with NFT specific tax guidance.
What are NFT Sales Tax, and When Do They Apply
NFT sales tax is a type of taxation that follows the same logic as the traditional sales tax model, whereby users are subject to local and state taxes when they purchase taxable goods. In this case, the taxable item would be an NFT – a digital asset that is non-fungible, meaning it cannot be replicated or counterfeited. Depending on the jurisdiction, taxes may apply to any tangible or intangible property transferred in exchange for money. This means that if you sell an NFT, you could potentially be liable for sales tax, depending on where you conduct your transaction. For example, in some states, buyers may need to pay sales tax on their NFT purchase at the time of the transaction or file quarterly returns regularly based on their total purchases from each state.
Additionally, sellers who do business within a specific state’s borders may have nexus and thus must collect and remit sales taxes to the respective jurisdiction. Furthermore, remember that if you have nexus with multiple jurisdictions, you will need to collect and pay taxes for each state’s rate where necessary. Finally, some jurisdictions may even require additional forms of documentation like invoices or sell orders when filing returns which could mean more paperwork and added complexity for those selling NFTs.
Currently, there are several states that have released explicit guidance on NFT sales tax: Pennsylvania, Washington, Minnesota, and Wisconsin. However, over 31 states already tax digital products and goods, so it’s safe to assume that NFTs are also subject to sales tax in those states. As the NFT market continues to grow, more states are likely to issue specific guidance on NFT sales tax.
Who Has To Pay NFT Sales Taxes
For those selling Non-Fungible Tokens (NFTs), the responsibility of collecting and paying sales taxes falls on the seller. This can be applicable to individual sellers and marketplaces depending on the specific tax jurisdiction. Depending on the jurisdiction, there are different statutory requirements for sales tax, including compulsory filing or reporting of taxable income. To collect sales tax, vendors need to obtain customer information at checkout in order to accurately calculate nexus and the sales tax amount in native cryptos. This can be especially challenging as sellers must acquire accurate information from customers that live in different states, countries, or jurisdictions with varying tax laws.
This is why we created Digital Impost. Digital Impost is designed to simplify the process of NFT state sales tax compliance for web3 and digital asset businesses, enabling them to achieve regulatory compliance and focus on their core operations. The platform uses advanced algorithms and data analysis to accurately calculate and report on sales tax liabilities for digital asset transactions.
Risks of not collecting or remitting
Furthermore, businesses must take caution when collecting and filing since there is the risk of not remitting taxes appropriately. Tax authorities may retroactively apply penalties of up to 6 years in back taxes if they find a business is not compliant with current regulations. Additionally, companies may receive negative public attention and potential legal repercussions if found to be non-compliant with state or federal laws regarding NFT sales taxes. It’s important for companies to proactively keep up with enforcement regulations and prepare for a “Wayfair” moment in the NFT industry where large-scale compliance measures can come into effect.
Steps To Collecting and Filing
The most efficient way to collect and file NFT sales taxes is using sales tax automation software such as Digital Impost. This software allows businesses to automate the entire sales tax process, from nexus assessment and real-time nataive cryptocurrency calculations to reporting and filing. With the help of this NFT sales tax software, businesses can accurately determine the proper amount of taxes for each sale, which helps them stay compliant with local laws and regulations. Additionally, it offers features such as customer data capture (including customer address) to ensure that all required information is collected before processing an online transaction. Finally, this sales automation solution also provide a range of back-office tools to simplify the entire NFT sales tax process.
One of the major challenges for NFT sellers is sourcing the sale, which determines the appropriate tax jurisdiction and rate. Some states, like Washington, have provided guidance on sourcing based on the customer’s address. However, if you don’t have the customer’s information, sourcing becomes more complex. Collecting as much information as possible from customers is crucial for accurate tax collection.
In conclusion, collecting and filing NFT sales taxes can be made more effortless and streamlined with the help of professional tax automation software, allowing businesses to remain compliant while enjoying additional benefits like simplified reporting requirements. Without a software that can automate this process, it’s nearly impossible to comply with NFT sales tax regulations and tax guidance when NFT sellers need to collect and remit taxes of thousands of transactions. Usinga the leading NFT sales tax automation software gives businesses access to advanced features such as customer data capture, ensuring they have all the necessary information they need before processing any online transactions.
Wrapping Up
We’ve seen many states including Washington, Minnesota, Michigan and Pennsylvania take steps in clarifying when sales tax applies to digital assets and NFTs. These updates are interpretations of existing laws that could be applied both retroactively and prospectively. It’s likely that more states will follow suit with guidance. Digital asset and web3 businesses that are selling NFTs that want to be long-term industry players need to ensure that they are compliant with NFT sales tax filing and remittance to avoid unwanted tax surprises and negative publicity. Our team at Digital Impost has created a practical solution that enables businesses to do this with ease. Our Web3 NFT sales tax software is built on cutting-edge technology and is designed to be user-friendly and intuitive.
Navigating NFT sales tax requires a thorough understanding of tax regulations, determining nexus, collecting customer information, and remitting taxes appropriately. Stay compliant and avoid any surprise tax bills by following the guidelines outlined in this comprehensive guide. Digital Impost offers tools and solutions to simplify the process, ensuring accurate tax calculations and seamless tax compliance for NFT artists and sellers.
About Digital Impost
Digital Impost is the pioneering software company revolutionizing sales tax automation for NFTs, Web3, cryptocurrencies, and digital assets on the blockchain. With our cutting-edge solution, businesses selling NFTs and goods/services in the digital realm, along with their CPAs, can finally streamline their sales tax collection and filing processes. We are the industry’s first software to offer comprehensive automation specifically tailored for the unique challenges of the digital asset space. By simplifying complex tax regulations, ensuring compliance, and saving valuable time and resources, Digital Impost empowers businesses to focus on what they do best—driving growth and innovation in the digital economy. Join us on the forefront of this transformative journey and unleash the true potential of your digital business with Digital Impost.
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