Sales tax has a universe of changing conditions. Now we can add more: cryptocurrency (such as bitcoin) and what seems to be its cousin, non-fungible tokens (NFTs).

Already the IRS is turning a bright light on these assets as more transactions take place in a virtual world. What are the sales tax ramifications?

Few know for sure – yet.

Big, and getting bigger 

Comparatively, sales tax when dollars and hard currency are involved is clear: Sell something for a national currency and in most cases you have to collect and remit tax, either state sales or use tax or Value-added Tax (VAT) or Goods and Services Tax (GST) in much of the rest of the world. 

The U.S. has possibly the most complex sales tax regime. Each state sets its own sales tax rules, often with widely varying approaches. Generally, the obligation to collect and remit sales tax on most products begins when your company establishes nexus in a state determined by economic or physical thresholds. 

What happens when cryptocurrency is involved?  Does the requirement to collect sales tax, VAT, or GST change? What about when you buy or sell a product built on unprecedented technology like NFTs? 

Is cryptocurrency really as widespread as the hoopla would have us believe? Well, some 59 million Americans own some form of cryptocurrency – and that’s a conservative estimate from a few years ago. Crypto appears to offer a hedge when economies wobble and recently captured headlines as a monetary rescue for a war-battered Ukrainian government.

NFTs are also getting attention. These digitized assets resemble cryptocurrencies but are different – most people buy NFTs with crypto, for instance – and are termed “distinctive digital assets” denoting ownership of such collectibles as sports cards and artwork, and even designer digital footwear and Tweets. 

Growth in both crypto and NFTs is expected to remain off the charts for years to come. But again, what does that mean for sales tax?   

Enter taxes 

Crypto is the star of the first actual question on the latest IRS Form 1040: “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?” NFTs are still treated like stocks, incurring capital gains tax – for the time being, anyway.  The IRS may eventually classify them as “collectibles,” which would incur a different tax.

Ohio tried accepting crypto for taxes four years ago but soon abandoned the idea. More recently, governors in Colorado and Florida expressed openness to accepting crypto for paying taxes. There’s similar interest in California, Arizona, New York, Hawaii and Massachusetts – not to mention the federal government, which may soon explore digital currency for the U.S. Central Bank.

Florida Gov. Ron DeSantis did stipulate that the option would be mostly for businesses within his state – but Colorado has enacted a law exempting digital tokens from securities laws that govern stocks and bonds and Colorado Gov. Jared Polis likened his state’s acceptance of crypto to accepting common credit cards for taxpayer transactions.

Sales tax questions 

As often happens with sales tax, the answer depends from state to state. Sales tax is due where it’s due on purchases no matter the currency. The question is, what’s the currency worth and how do states recognize its value? (Accounting and consulting firm BDO has an excellent article on this.)

Most states have issued little or no sales tax guidance regarding crypto. Several, like Michigan, are trying to assemble state-level policies. New York has said that because crypto is intangible property, the purchase of crypto is not a taxable transaction for sales tax purposes. But if using crypto as payment for taxable goods or services, the purchaser will owe New York sales tax on the market value of the crypto at the time of the transaction.

New Jersey considers virtual currency intangible property not subject to sales tax when it’s bought for investment purposes. “When a person uses convertible virtual currency as payment for taxable goods or services, New Jersey Sales or Use Tax applies,” the state says. “Any seller and/or retailer of taxable goods or services that accepts convertible virtual currency as payment must determine the fair market value of the currency in U.S. dollars as of the date of payment and charge the purchaser Sales Tax on the underlying transaction.” The state says that sellers that accept virtual convertible currency must record: the value of the convertible virtual currency accepted at the time of each transaction, converted to USD; the amount of sales tax collected at the time of each transaction; and report such sales and remit sales tax due (in dollars, please).

Sales tax can also figure in cryptocurrency mining. An involved, energy-heavy computer process to create crypto. Texas, to name one state, has a lot of cryptocurrency miners because the state doesn’t regulate this business and offers miners sales tax incentives (and has low energy costs).

Other states such as Georgia, Kentucky and Wyoming have floated sales tax incentives or exemptions for such things as data center equipment purchases or the costs of electricity.

At this point, the crypto/NFT sales tax question in most states seems to boil down to four factors:

  • Whether the state considers crypto tangible or intangible property.
  • Fair market value of the cryptocurrency at the time it was used to make a purchase.
  • How the state tax authorities consider other currencies, such as that of other countries.
  • In the case of using crypto to purchase an NFT, whether the state is one of the many that impose a tax on sales of digital goods.

As with everything concerning sales tax, expect these conditions to change fast.

As sales tax continues to evolve, outsourcing sales and use tax management to an expert can save your business time, money and stress. Contact TaxConnex to learn how we can help. To read more on sales tax and cryptocurrency, click here - Sales Tax and Crypto: Latest Developments

Robert Dumas

Written by Robert Dumas

Accountant, consultant and entrepreneur, Robert Dumas began his public accounting career on the tax staff at Arthur Young & Co., followed by a brief stint at Grant Thornton. In 1998, Robert founded Tax Partners, which became the largest sales tax compliance service bureau in the country, and later sold it to Thomson Corporation. Robert founded TaxConnex in 2006 on the principle that the sales tax industry needed more than automation to truly help clients, thus building within TaxConnex a proprietary platform and network of sales tax experts to truly take sales tax off client’s plates.