States Turning Eyes to Taxation of Cryptocurrency and Non-Fungible Tokens (NFTs) | Cadwalader, Wickersham & Taft LLP

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Because the IRS ponders its strategy to taxing cryptocurrency and NFTs, states are more and more imposing taxes on some digital asset transactions, together with the usage of cryptocurrencies, as mentioned beneath:

  • New York broadcasts apportionment guidelines to deal with gross sales of cryptocurrency as digital merchandise and tax accordingly. The New York State Division of Taxation and Finance revealed draft steerage, included right here, increasing the apportionment guidelines for digital merchandise to incorporate cryptocurrency or related belongings digitally delivered, and in doing so, clarified that the earnings sourcing guidelines from the sale of cryptocurrency ought to comply with these for digital belongings for New York state tax functions.
  • New Jersey will tax digital foreign money transactions for items and companies underneath gross sales tax and is learning methods to establish further transactions topic to tax however is not going to impose gross sales tax on digital currencies bought for funding. New Jersey’s Division of Taxation indicated that it’s making a working group to higher establish cryptocurrency transactions topic to gross sales tax and is contemplating data trade insurance policies with the IRS and different states. The Division of Taxation beforehand issued a Technical Recommendation Memorandum (TAM), included right here, in March stating that the acquisition of digital currencies for funding functions isn’t topic to gross sales tax; in contrast, the acquisition of taxable items or companies with digital currencies is topic to gross sales tax in addition to document conserving necessities of the Vendor. The TAM additional indicated that for Company Enterprise Tax and Gross Revenue Tax functions, New Jersey would comply with the federal tax remedy of digital foreign money. 
  • Washington will tax sellers, purchasers, and marketplaces of NFTs underneath its gross sales tax and enterprise & occupation tax regimes per newly revealed steerage. Washington’s Division of Income issued an Interim Steering Assertion (IGS) clarifying the tax remedy of transactions involving NFTs for gross sales tax in addition to enterprise & occupation tax functions. The IGS impacts sellers, purchasers and NFT marketplaces the place gross sales are sourced to Washington. Included within the IGS are measures to calculate the gross sales worth of NFTs, together with the place cryptocurrency is acquired as consideration, obligations of the vendor and NFT marketplaces to keep up data, implications on blended transactions the place NFTs are bundled with different items and companies, and necessities for NFT marketplaces to gather and remit gross sales tax on behalf of its sellers. The IGS could be discovered right here.
  • Arizona carves out airdrops from gross earnings and permits deduction for sure transaction charges paid on cryptocurrency and NFTs. Arizona’s not too long ago enacted laws, included right here, supplies that digital foreign money and NFTs acquired pursuant to an airdrop aren’t taxable on the time of the airdrop however are taxable on their subsequent sale. Airdrops are a method of distributing cryptocurrency to the distributed ledgers of a number of taxpayers. The laws additional permits taxpayers to subtract from adjusted gross earnings on digital currencies or NFTs so-called “gasoline charges,” that are facilitation charges paid to digital networks for buy, sale or trade of digital currencies or NFTs. The subtraction applies to years the place the taxpayer acknowledged acquire or loss on digital currencies or NFTs, and has not in any other case included the gasoline charges in its foundation. Arizona’s laws contrasts with U.S. federal tax legislation and Rev. Rul. 2019-24, the place the IRS handled cryptocurrency acquired pursuant to an airdrop following a hard-fork as taxable on the time of receipt. See our earlier BrassTax article right here for a dialogue of prior IRS steerage on airdrops.

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