Buying and minting NFTs transcends researching promising NFT projects and getting an NFT wallet. NFTs are unique digital representations or physical or real-life assets stored on the blockchain, and it would be wise to know the key regulations guiding NFT transactions in your jurisdiction and chosen NFT marketplace.
How are intellectual properties protected as NFTs?
Intellectual properties metadata like digital art, books, music, and concert tickets can be minted into NFTs, digitally representing physical or digital assets.
One might wonder how digital art could be minted and stored in NFTs wallets and ask the following questions – what happens to the digital art itself?; does the artist sell that with the NFT? Or what about a physical painting?
Will a court recognize an NFT representation of a physical painting as proof of purchase?
Do NFTs have copyright protection?
An NFT representing a real-world asset is, by default, protected by the asset’s copyright, depending on the asset’s jurisdiction.
Here’s where contractual terms are set either in the smart contract or by the NFT Marketplace.
Say an artist minted his painting and sold it as an NFT. His smart contract could specify that the buyer won’t have the right to replicate the painting and sell it under the buyer’s name.
However, the artist loses the right of ownership of that painting to the buyer. Huge companies are also extending their trademarks to include digital products.
The NFT Marketplaces and smart contracts have to find the perfect balance in the flexibility of rights and find the perfect balance.
NFTs Potential tax considerations
NFTs transaction tax can be levied against the creator, buyer, and Marketplace.
How are NFT creators taxed?
Minting NFTs or storing them in secure NFT wallets is not taxable since it generates no income. So, an NFT Creator’s taxable income is from the first sale and royalties earned from subsequent sales of the NFTs.
Naturally, the NFT creator’s citizenship, residency, business registration, etc., thus, jurisdiction, characterizes their income’s taxability.
However, creators sell to buyers in different jurisdictions. Therefore, tax agencies’ are usually conflicted if the income flow from one jurisdiction is taxable compared to another because of the following aspects:
- Unclear legal rights, smart contracts, and legal rights in a jurisdiction.
- Indecision and shallow analysis in classifying the earnings as rewards and if the earnings should, in turn, attract tax withholding.
- Difficulty in determining the buyer’s location and, thus, where the income was generated.
How Primary and Secondary NFT Buyers are taxed
Cryptocurrency regulatory and financial tax bodies consider crypto and NFTs as properties, not currencies.
Therefore, any income generated from exchanging one property (crypto) for another (NFT) is taxable in jurisdictions where capital gains differ from trading gains. Furthermore, territorial taxes would help determine the income source or location. But NFTs buy-sell transactions are determined as one-way or two-way tax by the local authorities of each jurisdiction.
How NFT Marketplaces enforce taxes
There are no current universal means by which jurisdictions ensure NFT Marketplace enforces these taxes. However, customary tax laws require the marketplace to at least report its earnings on procuring the transaction. These earnings are, of course, taxable.
Summary
NFTs and accounting involve various parties; issuer, holder, and the marketplace. The NFT holder must be assured of their holding rights, what the NFT they have represents, and if their rights are what they think they are.
The issuer or seller must also designate some rights over the NFT to the buyer, and the Marketplace must ensure fair flexibility in transferring and retaining the rights.
Since NFT accounting is still budding, various jurisdictions must work on maintaining proper regulatory balance.
Therefore, consult a blockchain lawyer, IRs, or other financial bodies in your jurisdiction to avoid ugly situations before jumping on a new NFT project.