This past May, the Pennsylvania Department of Revenue issued REV-717, an updated guide for retailers on the Commonwealth’s State and Local Sales, Use and Hotel Occupancy Tax.

Interestingly, the portion of REV-717 discussing computer hardware and software specifically enumerated non-fungible tokens (“NFTs”) as being subject to Pennsylvania’s sales and use tax.

NFTs have recently grown in popularity due to publicity from high profile purchases by celebrities like Steph Curry and Eminem. NFTs are essentially digital assets that can consist of anything from art, to music, or videos, which can then be financially secured using the blockchain system, similar to cryptocurrencies such as Bitcoin. As the name suggests, NFTs are usually unique, one-of-a-kind items which generates their value.

As of today, several other states and jurisdictions are contemplating whether to have NFTs subject to their sales and use taxes, such as Washington and Puerto Rico. The Multistate Tax Commission and the Streamlined Sales Tax Governing Board are also considering whether NFTs should be classified as digital assets for sales tax purposes.

The trouble with taxation of NFTs, however, derives from their unique nature. By virtue of no two NFTs being the same, the tax treatment could also vary from NFT to NFT, depending on whether it is tangible, intangible, or some combination of the two. Simply stated, there may not be a “one size fits all” solution, and proper tax treatment may depend on the underlying asset of the NFT.

To make matters more complex, the IRS has yet to issue any guidance on the tax treatment of NFTs in any notices or bulletins, other than issue warnings of the money laundering risks NFTs pose due to using the anonymous blockchain system.

In short, if the popularity of NFTs is here to stay, then an interesting set of tax issues is likely to follow to determine the proper tax treatment of NFT sales, whether they occur in Pennsylvania or anywhere else on the earth.

If you have any questions about non-fungible tokens or any state tax matter, please feel free to contact Justin Abodalo (717-237-5362) or any member of the McNees State and Local tax team.