Michigan Explains Tax Treatment of Non-Fungible Tokens

By Peter G. Pupke

The Michigan Department of Treasury has issued information regarding the state’s sales and use tax treatment of non-fungible tokens (NFTs). (Michigan Treasury Update, 08/01/2024.)

Non-fungible tokens.

A non-fungible token (NFT) is a digital asset that links ownership to unique physical or digital items—such as works of art, music, or videos. An NFT is a unique digital identifier that is recorded on a blockchain, which is used to certify ownership and authenticity. An NFT cannot be copied, substituted, or subdivided. NFTs allow content creators to limit the number of owners of an asset to as few as one, thereby creating an element of scarcity that has never existed in the digital world. NFTs can be bought, sold, and traded like any other cryptocurrency, but they represent a unique and indivisible ownership claim to a specific asset or set of assets. NFTs are bought and sold online and are often mentioned in the same context as cryptocurrencies, such as Bitcoin and Ethereum. However, NFTs are not cryptocurrency. NFTs are largely built with the same kind of programming as cryptocurrency and cryptocurrency is often used to purchase NFTs. However, that is where the similarities end. Unlike cryptocurrencies, which are fungible, NFTs are non-fungible. Hence the name “non-fungible tokens.”

The majority of the NFT market consists of digital property, i.e., digital artwork, photographs, video clips, domain names, music, and autographs. NFTs can also represent real-world items like artwork and collectibles. “Tokenizing” real-world tangible assets makes buying, selling, and trading them more efficient while reducing the possibility of fraud. Having ownership of an NFT means the buyer can prove ownership of the specific NFT and that it is authentic—like a certificate of authenticity. Tokenized assets can be easily and efficiently transferred among people anywhere in the world.

Michigan sales and use tax treatment of NFTs.

Currently, Michigan does not tax NFTs representing digital goods nor does it generally tax digital goods. Mich. Comp. Laws Ann. § 205.52(1) levies a 6% tax on the sale of tangible personal property. “Tangible personal property” is defined as “personal property that can be seen, weighed, measured, felt, or touched or that is in any other manner perceptible to the senses…” under Mich. Comp. Laws Ann. § 205.51a(r). Digital NFTs do not fall within the definition of “tangible personal property.” To determine whether an NFT transaction is taxable, taxpayers should first determine whether the NFT represents digital or tangible property. The NFT is not subject to Michigan sales tax if it is purely digital, such as a digital image or sound. Conversely, if the NFT represents an ownership interest in tangible personal property, the sale constitutes the sale of tangible personal property and is subject to tax.