Minnesota, Michigan Tax Agencies Address Cryptocurrency

By: Emily Hollingsworth

Michigan and Minnesota are among the latest states to release information on the state tax treatment of non-fungible tokens (NFTs).

The Michigan Treasury Department’s Tax Policy Division published a newsletter in August that discusses the state tax treatment of NFTs and digital currencies, noting that Michigan conforms with the federal tax treatment of cryptocurrencies. 

Ron Leix, spokesperson with the Michigan Treasury Department, told Tax Notes September 8 that the August newsletter served as informal guidance. “There are no rules or statutes on cryptocurrency specifically,” he said. According to the newsletter, a taxpayer's federal adjusted gross income "is the starting point of the Michigan income tax return and the calculation of state income tax. While Michigan permits certain deductions and other adjustments to federal AGI, currently, Michigan does not have any rules or policies with respect to digital currency transactions that differ from the federal policies regarding such transactions.”

For NFTs, Leix said that “Michigan does not have any guidance on those at this point. However, to the extent the NFT represents a digital good, it would not be taxable since Michigan does not tax digital goods.”

The newsletter refers readers to its 2015 Treasury update for information on the application of sales tax to digital currency, which says that virtual currency on its own “is not tangible personal property for purposes of the General Sales Tax Act or the Use Tax Act. Therefore, purchases of virtual currency — as contrasted with purchases made with virtual currency — are not subject to sales or use tax.”

Minnesota’s Department of Revenue has issued an updated fact sheet that includes information about NFTs in relation to sales and use tax treatment of digital products. The fact sheet, released August 23, says NFTs are subject to sales and use tax if the underlying good or service is taxable in the state. 

Steve Warren, senior manager with Schechter Dokken Kanter CPAs and a member of the Minnesota Society of CPAs, told Tax Notes September 8 that while the fact sheet doesn’t present many new details on the subject, it gives practitioners insight on the DOR’s interpretation of sales and use tax related to NFTs. “It’s helpful to have the DOR’s position in writing,” he added.

Minnesota DOR spokesman Ryan Brown told Tax Notes September 8 that the fact sheet was "updated as guidance to reflect changing forms of technology and ways of doing business in order to help taxpayers and tax professionals with questions they may have," and was not tied to any new legislation or policies. He mentioned other states that have recently provided information on cryptocurrency and NFTs, including Washington state, which released guidance on the taxation of NFTs earlier in the summer.

Other recent state movements on cryptocurrency include an Arizona bill (H.B. 2204) enacted July 6 that creates individual income tax subtractions for the value of virtual currency and NFTs received in airdrops or mass distributions; an update to New York state's corporate tax reform draft regulations on apportionment to include cryptocurrency in the definition of digital product; and a report by the Kansas Legislative Division of Post Audit that compared the state's cryptocurrency tax policies with those at the federal level, concluding that the state may be missing out on tax revenue from cryptocurrency transactions.