States Turning Eyes To Taxation Of Cryptocurrency And Non-Fungible Tokens (NFTs)

As the IRS ponders its approach to taxing cryptocurrency and NFTs, states are increasingly imposing taxes on some digital asset transactions, including the use of cryptocurrencies, as discussed below:

• New York announces apportionment rules to treat sales of cryptocurrency as digital products and tax accordingly. The New York State Department of Taxation and Finance published draft guidance, included  here, expanding the apportionment rules for digital products to include cryptocurrency or similar assets digitally delivered, and in doing so, clarified that the income sourcing rules from the sale of cryptocurrency should follow those for digital assets for New York state tax purposes.
• New Jersey will tax virtual currency transactions for goods and services under sales tax and is studying ways to identify additional transactions subject to tax but will not impose sales tax on virtual currencies purchased for investment.  New Jersey's Division of Taxation indicated that it is creating a working group to better identify cryptocurrency transactions subject to sales tax and is considering information exchange policies with the IRS and other states. The Division of Taxation previously issued a Technical Advice Memorandum (TAM), included  here, in March stating that the purchase of virtual currencies for investment purposes is not subject to sales tax; by contrast, the purchase of taxable goods or services with virtual currencies is subject to sales tax as well as record keeping requirements of the Seller. The TAM further indicated that for Corporation Business Tax and Gross Income Tax purposes, New Jersey would follow the federal tax treatment of virtual currency. 
• Washington will tax sellers, purchasers, and marketplaces of NFTs under its sales tax and business & occupation tax regimes per newly published guidance.  Washington's Department of Revenue issued an Interim Guidance Statement (IGS) clarifying the tax treatment of transactions involving NFTs for sales tax as well as business & occupation tax purposes. The IGS impacts sellers, purchasers and NFT marketplaces where sales are sourced to Washington. Included in the IGS are measures to calculate the sales price of NFTs, including where cryptocurrency is received as consideration, obligations of the seller and NFT marketplaces to maintain records, implications on mixed transactions where NFTs are bundled with other goods and services, and requirements for NFT marketplaces to collect and remit sales tax on behalf of its sellers. The IGS can be found  here.
• Arizona carves out airdrops from gross income and allows deduction for certain transaction fees paid on cryptocurrency and NFTs.  Arizona's recently enacted legislation, included here, provides that virtual currency and NFTs received pursuant to an airdrop are not taxable at the time of the airdrop but are taxable on their subsequent sale. Airdrops are a means of distributing cryptocurrency to the distributed ledgers of multiple taxpayers. The legislation further allows taxpayers to subtract from adjusted gross income on virtual currencies or NFTs so-called “gas fees,” which are facilitation fees paid to virtual networks for purchase, sale or exchange of virtual currencies or NFTs. The subtraction applies to years where the taxpayer recognized gain or loss on virtual currencies or NFTs, and has not otherwise included the gas fees in its basis. Arizona's legislation contrasts with U.S. federal tax law and Rev. Rul. 2019-24, where the IRS treated cryptocurrency received pursuant to an airdrop following a hard-fork as taxable at the time of receipt. See our earlier BrassTax article  here for a discussion of prior IRS guidance on airdrops.

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