Non-Fungible Tokens
An NFT is a digital file containing art, music, video, or similar content. The NFT is then minted on a blockchain, which has a unique identifier that cannot be changed, replicated, or deleted. The authenticity of the NFT is verifiable, so the NFT becomes an original digital piece of art that can be bought and sold as any other collectible.
NFTs have taken off over the last few years as many different entities in the arts, sports, and entertainment industries have begun developing and selling NFTs for substantial sums of money. The potential to develop lucrative revenue streams is likely to fuel more interest in NFTs in the next few years. Although the law is still trying to catch up to NFTs, they have the potential to cause issues and potential liability in areas like intellectual property, tax, regulatory, and contract law.
Intellectual Property
Creators of NFTs who use third-party content could be liable for copyright infringement for using that content unless they fall under the fair use doctrine. The fair use doctrine allows a party to use copyrighted material for purposes like criticism and parody, news reporting, teaching, and research, but often requires extensive legal analysis. Other issues could arise for work created under a work-for-hire agreement where there are questions over who is considered the legal author of the work.
Tax
The purchase and sale of NFTs is a taxable transfer of property and is subject to capital gains. In some cases, NFTs may even be subject to the higher tax rate for collectibles. Since the value of an NFT is not determined until it is sold, both buyers and sellers of NFTs should consult tax specialists to advise on the tax consequences of purchasing or selling an NFT.
Regulations of NFTs
While there is currently no specific federal regulation pertaining to NFTs, federal, state, and international laws may apply to the funds used to purchase NFTs. The transfer of funds could implicate anti-money laundering and bribery laws. Buyers and sellers of NFTs should evaluate whether they are complying with U.S. law, global, and regional laws.
Contract
Careful review of the terms of sale is essential when buying or selling NFTs in order to protect the parties from possible liability. A buyer of NFTs must also verify the authenticity and seller’s rights to the NFT before purchase.
New technologies NFTs raise unique and novel legal issues. Creators, buyers, and sellers should consult an experienced attorney to help avoid liability and protect against substantial financial losses.