NFTs (Non-Fungible Tokens) are a type of digital token that is incorporated in a Smart Contract. Pictures, videos, memorabilia such as virtual baseball cards, or other sports cards could be an NFT. It could be anything from documents to tweets that are commemorated, and Non-Fungible means that there is only one of each kind.
It is critical to realize that the NFT is not the original artwork or a collectible, it’s only a Smart Contract that can set royalties, transfer, or ownership rights for the object it’s pointing to.
It can be programmed to collect royalties on future sales of the digital asset, or you can carve out other types of contractual terms within the code of the NFTs Smart Contract.
Now, let us go back a step with the sensational sale of Mike Winklemann’s artwork for a record-breaking $69.3 million at a Christie’s auction, which was one of the first introductions of NFTs in domain stream conversation, that played a huge hand in elevating and evolving just the general Crypto conversation to new heights, which can have a lot of additional complexities for Estate Planning.
Features OF NFT
- The concept of proven rarity is one of the feeds that make NFTs so unique, especially from a collector’s standpoint, and because of the hard coding behind each NFT, the chain of history is unique to that NFT from creation to where it exists. On a public Blockchain, a single point in time is totally transparent.
- An NFT can be made out of anything that can be converted into a digital file. It’s a new medium for artists who want to produce paintings and then convert them to a digital format that can then be uploaded to the Blockchain. Every NFT has a DES native address as well as uniqueness. You can produce 500 more, but that one position on the Blockchain (unique address) is different from every other five of the 500 you just established. It’s another method to own anything like a piece of art, sports collectibles, or to convert a trading card or baseball card into an NFT that can be sold.
- A single point in time is fully viewable on a public Blockchain, which aims to eliminate questions of authenticity, the chain of title, and ownership difficulties that might emerge with many traditional collectibles. However, there are a number of challenges or possible problems with NFTs. Although this technology has been around for a long time, it is still in its infancy, and some of the challenges for clients who use NFTs must be taken into account. The planning of NFTs is more difficult than the planning of Cryptocurrencies, which is more sophisticated.
- It’s possible to hold it in a variety of ways. To access and transmit an NFT, you’ll need a Private Key, which is an alphanumeric code. NFTs can be kept in a wallet or traded on a public exchange. While the owner may have the private keys and the ownership code inscribed in the Blockchain, an NFT can be read by the general public. NFTs might potentially raise a number of issues related to intellectual property and copyright.
Types Of NFTs
NFTs are of various types, for example, Elon Musk transformed one of his tweets into an NFT and auctioned it off. You could convert tickets for any type of event into NFTs to keep them operating in the same way, but they’d be stored on the Blockchain, which has its own set of benefits and drawbacks. Following are some common assets that can be turned into NFTs:
- Video Games
- Trading Cards/Collectible items
- Domain Names
- Virtual Fashion
- Historical Sports Moments
Real-World Examples Of Astonishing Uses OF NFTs
NFTs are more time-consuming, but they might be more secure. For example, Kings of Leon is a rock band who turned their newest album into an NFT and put it on the Blockchain. Some of the appeals of doing so come into play are some of the additional benefits that can be associated with it.
Anyone who purchased the NFT edition of their album received either bonus artwork or ticket sales opportunities that they would not have received if they had only purchased the physical or non-NFT digital album.
Some sports leagues are taking it a step further. For example, the NBA offers a product called NBA Top Shots in which the buyer receives a brief video clip of an NBA highlight, and the more spectacular the athletic feats. The higher the price, the more valuable that particular NFT is designed to be. You can purchase them from the NBA and receive a deck of cards that you unwrap and have no idea what you’re getting, but there is a secondary market where you can sell them.
Nike has patented a technique that uses NFTs to assist safeguard sneakerheads (addictive sneaker collectors) from fraud and counterfeit on the resale of new sneakers. NFTs are also being used by many premium designers to track and prevent fraudulent resales of their products.
With the use of these NFTs, there are service agreement terms. The majority of people will not bother to read the terms of service, which is a shame because the terms of service agreements contain a lot of restrictions.
NFTs Ownership In The Legal Frame
NFTs are typically organized as a license agreement in which you are granted a license with a set of restrictions on how you may use it. As a result, the terms of service may restrict your ability to transmit NFTs.
You might not be able to sell or give it away without relinquishing your NFT rights. If you breach these terms of service, you may lose all rights to the NFT, and you may or may not be able to display or show your NFT to anyone else, whether online or in person.
Most likely, your ability to monetize the NFT by displaying it for business and charging people to visit your virtual museum or in person will be limited. Some NFT contracts have an additional burden where they are constructed as Smart Contracts, which means that if an NFT is acquired and subsequently sold to a third party for a profit, the original owner (person from whom the NFT was first bought) may be entitled to 10% of the profit.
There are a number of limitations that the owner must be aware of, particularly when dealing with such expensive goods that command high auction and selling prices.
Tax implications of NFTs
- For federal income tax reasons, Cryptocurrency is treated as property rather than cash. Cryptocurrency or its use would be regarded as a property disposition, a capital gain, or a capital loss, depending on the length of time it was held.
The IRS views NFTs in the same light, although they might easily be classed and taxed as an art or a collectible in the future, resulting in higher capital gains and taxes. NFTs are considered personal property, which makes them taxable.
When Cryptocurrency is bought or sold in conjunction with an NFT, it is considered a transaction. As a result, Cryptocurrency is required even to mint an NFT.
- Transferring Fiat money into Cryptocurrency to mint or buy an NFT is the start of a taxable event that must be documented and tracked.
- The use of the NFT(whether the NFT is sold by a creator or trader) and frequency controls the way of taxation; there are times when it’s taxable income and other times when it’s capital gains.
As laws and regulations evolve, certain types of NFTs may be classified as securities or commodities, triggering a slew of new rules and disclosure obligations.
Issues With NFTs
- Storage charges and expenses related to purchasing and selling NFT on specific sorts of platforms are all part of the journey in NFT ownership.
- There is also the matter of Blockchain on which the NFT is stored, if it is moved to a different Blockchain, there may be issues with royalties not being recognized or the contract being invalidated, as there is currently no universal code that works flawlessly across several Blockchains.
- The Ethereum Blockchain is one of the most widely used Blockchains for NFTs, however, the prices of minting, storing, buying, and selling NFTs on Ethereum have been rising, therefore many people are looking into other Blockchains that operate in a similar way. It’s possible that they won’t work with an NFT that already exists on another Blockchain.
- For now, there is no way to create royalty arrangements inside the terms of service, and there could be a lot of underlying copyright issues in the art or asset itself that aren’t covered by the NFT.
- If copyrights aren’t being transmitted through the NFT’s terms of service, they’re most likely nonexistent. If not done with permission, NFTs can easily infringe on someone else’s copyright. For example, Damon Dash was sued by Jay-Z’s firm, Rockefeller Records, for minting an NFT of Jay-Z’s debut album, Reasonable Doubt. And the NFT was reportedly going to be auctioned off on the line market at super farms.
When Rockefeller learned of what was going on, they filed a lawsuit to prevent Dash from selling any stock in the Reasonable Doubt NFT, paying them damages and ruling that the firm, not Damon Dash, owned the NFT.
It’s worth noting that while Damon Dash, Jay-Z, and KA Burke each possess a third of Rockefeller Records, Damon Dash lacked the legal ability to execute an NFT of a company-owned asset.
- One major difficulty is that NFTs may have an asset that is stored on the Blockchain, and thus the Blockchain is referenced in the NFT’s Smart Contract, but this is not necessarily the case. An artist can create an NFT of their work, and the image of the actual work can be seen on the artist’s website. What happens if the website goes down, the artist passes away, or they fail to pay their domain renewal fees? The NFT will be rendered entirely useless. When contemplating NFTs and purchasing them, it’s critical to know where the actual underlying asset is located. And if it can be transferred, if it’s simply on the website of, say, a third party or perhaps the original developer.
Although some NFTs point to an actual asset that is stored on the Blockchain, not all NFTs have assets that are stored on the Blockchain. Some can simply be on a website, and that’s where the real issue arises because when minting an NFT, there’s no necessity that the actual asset that the NFT is pointing to outside the Blockchain be located anyplace, and so there’s a lot of concern.
People have lost a lot of money because they didn’t know the underlying asset that the NFT was pointing to wasn’t on a Blockchain, but rather on a website that was controlled entirely outside of the NFT by a third party, and that website went down, rendering the NFT absolutely useless. Because it’s merely a Smart Contract, the NFT is still there, but the underlying asset it’s pointing to is now a dead web page.
So, do agreements need to be made in the contract when an NFT is purchased to protect an NFT that could potentially go to a dead webpage, or would having insurance help?
Ways To Plan For NFTs
- Although, insurance is not yet available for NFTs, examining the conditions of service agreements and the location of the underlying asset when acquiring an NFT can help. If the NFT for the asset you want to buy isn’t on a Blockchain, see if there are any ways to get it onto a Blockchain to avoid those problems.
- You can create an LLC or various sorts of trust structures that are also owned or have LLCs within it that own the underlying NFTs. It is contingent on the client’s ultimate objectives. There may be ways to encode beneficiary designations into the coding of an NFT in the coming years.
- A Digital Estate Plan is a fine way to ensure the privacy of the details of your assets and their transfer to your family members after your demise or immobilization.
These technologies are new, the law has not yet caught up to their unique features and needs, and the code’s regulations do not always follow the law or what the law and its evolution will be.
We’re only just beginning to understand the potential applications of NFTs, Cryptocurrencies, and other emerging technologies like AI, virtual reality, augmented reality, deep fakes, the metaverse, and web 3.0, and our understanding of the far-reaching effects of all of these technologies on all aspects of our lives is still very limited.