US: Michigan Treasury Clarifies Tax Rules on NFTs

The global popularity of NFTs has led to a shared challenge for governments worldwide. Taxation of services and products related to NFTs has become a hot topic, with many countries grappling with the implementation and interpretation of their laws and regulations.

The Michigan Department of Treasury (MDOT) addressed the taxability rules for NFTs in its latest Update document to prevent potential problems and address existing ones.

Taxability Rules for NFTs

As the MDOT explains, the NFT is a digital asset that establishes the ownership of a unique digital or physical item, like artwork, video, or music. The NFTs are based on blockchain technology, which is used to verify the ownership and the authenticity of the items, assuring that the NFTs are not copied or changed in any other way.

Regardless of the type of the NFTs, they are all created in the mining process, which refers to creating a new block on the blockchain with a unique identifier directly linked to one blockchain address.

In Michigan, the NFTs are not taxed, reflecting the taxation rules on digital goods. However, tangible personal property that can be ‘seen, weighed, measured, felt, or touched or in any other manner perceptible to the senses’ is taxed at 6%. Therefore, it is clear that NFTs do not fall under this definition.

That means that to determine if the NFT is taxable or not, it is necessary to determine if the NFT represents the digital or physical property. If solely digital, sales tax rules do not apply. However, if NFT establishes ownership of tangible personal property, e.g., a car, the sale of NFT is subject to the sales tax.

Conclusion

Taxability rules for NFTs will further develop, as will the digital products and services. That is why creating clear rules for the taxation of the NFTs is necessary. To achieve this, governments are investing valuable resources to clarify and define a playing field, disabling tax fraud and evasion related to NFTs.

That is why explanations such as this provided by the MDOT are important to all parties involved in minting, buying, and selling NFTs.

Source: The Michigan Department of Treasury Update