The non-fungible token (NFT) remains a sizzling commodity. These digitized assets denote ownership of such collectibles as sports cards and artwork, even designer digital footwear.


Two signs of the size of the sizzle: The online NFT platform OpenSea claims to be worth more than $13 billion. Some NFTs alone on OpenSea have sold for millions and in recent years the average sales price of an NFT (an admittedly volatile commodity) jumped from about $150 to $4,000.

That’s a lot of tax potential, and the feds have started to notice. With an eye to pinning down taxability, the IRS proposes to determine whether an NFT constitutes a collectible, such as a gem, by analyzing whether the NFT’s associated right or asset is a Sec. 408(m) collectible.

“Similarly,” reads the proposal, “an NFT does not constitute a section 408(m) collectible if the NFT’s associated right or asset is not a section 408(m) collectible. For example, a right to use or develop a ‘plot of land’ in a virtual environment generally is not a section 408(m) collectible.” The issue of such “look-through” examination of an NFT’s value, experts warn, is not clear and will raise problems in application.

Nevertheless, how long before states start trying to tap this market of NFTs and taxes?  Not long, it appears.

Guidance varies

Look-through for sales and use tax purposes will attempt to link taxability to the underlying good or service to which the NFT is connected, and states have begun to try.

Some states, at least so far, are more specific than others. Major states like California, Illinois, New York and Texas have reportedly issued little or no NFT taxation guidelines. So far, Pennsylvania reportedly just lists NFTs as “taxable,” though Michigan does go so far as to classify NFTs as digital goods not subject to the state sales and use tax.

At least three states seem to have made the most progress with NFTs and sales tax.

Minnesota: The Department of Revenue notes that NFTs are subject to sales and use tax when the underlying product (goods or services) is taxable in Minnesota. NFTs may entitle purchasers to receive products or services including but not limited to digital products such as music, audio visual works or video games; admissions to sporting events or concerts; prepared food and beverages; and tangible personal property such as collectibles or memorabilia.

Washington: Interim guidance says that factors determining the NFT tax treatment of a transaction include whether the transaction is comprised of multiple components or merely a digital code that grants the owner access to a digital good; the taxability of each underlying component; and the identity of the parties to the transaction (e.g., is the purchaser a consumer or reseller?).


NFTs guidelines also indicate basic arrangements involving NFTs and their sales (or, in Washington’s case, also Business and Occupation [B&O]) tax obligations depending on where the object of the purchase is:

  • A standalone digital product (i.e., the NFT digital artwork, photographs, video clips, autographs, and so on). Sales of digital products are generally subject to retail sales tax. The seller is also subject to B&O tax measured by the gross proceeds of the sale.
  • A standalone good or service (other than a digital product) classified as a retail sale and the NFT itself is not the object of the purchase. Sales of goods or services defined as retail sales under state statute are subject to retail sales tax. The seller is also subject to B&O tax measured by the gross proceeds of the sale.
  • A standalone good or service not classified as a retail sale under statute. Sales of goods or services not so defined are not subject to retail sales tax, but the seller may be subject to B&O tax, use tax or some other excise tax measured by the gross proceeds.

If the sale of an NFT includes a royalty payment to the NFT creator or other party who retains the right to royalties for future sale or distribution of the NFT, the gross income from royalties subject to royalties B&O tax.

Wisconsin: According to a 2022 state Tax Bulletin, an NFT is “a unique digital identifier that is recorded in blockchain [and] used to certify authenticity and ownership of a particular product and cannot be copied or substituted.” The sale or purchase of a NFT may be taxable if the underlying product, good, or service is taxable in Wisconsin. In examples, if an NFT entitles the purchaser to download music or movies, sale of the NFT is a taxable specified digital good. If the NFT entitles the purchaser admission to a sporting event, the sale of the NFT is a taxable admission. If an NFT entitles the purchaser to a tangible piece of artwork, the sale is taxable tangible personal property.

There are NFT challenges with tax, a bit of computer code that can unlock fantastically valuable assets. What’s the key to that value, the object or the access? Where does the sales tax obligation rest along a complex tech trail that few but specialists really understand? How will that determination be challenged in court?

Watch for states to continue to examine these and other key questions as the NFT market continues to expand.

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. 

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.