Non-Fungible Tokens (NFTs)

A non-fungible token, or NFT, is a unique set of software codes recorded on a blockchain, which is used to certify authenticity and ownership of a digital representation of something of value that can be bought, sold, and traded.

What can be represented by an NFT?

The following provides examples:

• Digital artwork and other collectibles such as sports cards, memes, and domain names.
• Digital equivalents of tangible personal property defined under 72 P.S. § 7201(m)(2), which includes, but is not limited to, videos, photographs, games, and music.
• Rights to products or services such as concert tickets and memberships to a club or restaurant.
• Donations to charitable causes such as partial ownership of the Amazon Rainforest.

What determines the taxability of an NFT for sales and use tax purposes?

A sale at retail involving the transfer of ownership or a right to use an NFT that represents taxable tangible personal property as defined in the Tax Reform Code, as amended, or grants ownership or use of a taxable product or service as defined in the Tax Reform Code, as amended, is subject to tax. See, 72 P.S. §§ 7202(a), 7201(m).

If the NFT is not a digital good as defined in 72 P.S. § 7201(m)(2) or is intended to grant ownership or use of a nontaxable product or service (for example clothing), the sale at retail of the transfer of ownership or a right to use an NFT is not taxable. 

If the sale of an NFT includes both taxable and nontaxable components, the entire sale amount is subject to sales tax unless the nontaxable components are separately stated and identified.

Where is the sale of an NFT sourced for sales and use tax purposes?

Sales of NFTs are sourced to Pennsylvania if the purchaser is located in Pennsylvania. If the billing address on an invoice for an NFT purchase is a Pennsylvania address, then it is presumed that the purchase occurred in Pennsylvania.

What are the record keeping requirements?

The seller is required to prepare and maintain records under 61 Pa. Code § 34.2 that allow the Department to ascertain the seller’s compliance with the Tax Reform Code, as amended. These records must document the amount of taxable and nontaxable sales, the amount of tax collected, and describe items sold without tax. In accordance with 61 Pa. Code § 32.2, an exemption certificate is required to support nontaxed sales of tangible personal property or taxable services unless the other records document that the property sold is not subject to tax or that the property sold was required to be and was actually delivered to a location outside of the Commonwealth.

How is the purchase price of a NFT determined for sales and use tax purposes?

The purchase price of a sale at retail is the consideration received by the seller, which is the “total value of anything paid or delivered, or promised to be paid or delivered, whether it be money or otherwise, in complete performance of a sale at retail or purchase at retail…” 72 P.S. § 7201(g). If a seller receives cryptocurrency in exchange for an NFT, the value of the cryptocurrency tendered must be converted to US dollars as of the time of the sale.

How is the sale of a NFT taxed when it represents property and/or services that are both taxable and nontaxable?

The sale of an NFT that represents property and/or services that are both taxable and nontaxable is subject to tax if the taxable and nontaxable components are not separately stated.  See, Downs Racing, LP v. Commonwealth, 196 A.3d 603 (Pa. 2018).

Are royalties generated from subsequent sales of an NFT by third parties subject to sales and use tax?

Since a “royalty” paid by a party other than the purchaser does not convey ownership of the NFT or a right to use the NFT as defined in the Tax Reform Code, as amended, the payment of royalties generated by a subsequent sale of an NFT are not subject to sales and use tax. See, 72 P.S. § 7201(k), (o).

What are the sales tax collection obligations of a marketplace facilitator that sells NFTs?

Marketplace facilitators and online sellers of NFTs who maintain a place of business in Pennsylvania, including by having economic presence (please see Sales and Use Tax Bulletin 2019-01) must register, collect, and remit Pennsylvania sales tax.

What is the effective date of NFTs being subject to tax?

NFTs have been subject to sales and use tax since the addition of digital goods in Act 84 of 2016.

The department is not planning any retroactive enforcement with regard to taxes owed on NFT sales that occurred prior to the May 2022 issuance of the updated guidance in the Retailers Information Guide (REV-717).