NFTs Are Hot, But Patchwork of Laws, Rules Needs Watching – Bloomberg Tax

NFTs Are Hot, But Patchwork of Laws, Rules Needs Watching – Bloomberg Tax

Non-fungible tokens, known as NFTs, have become the latest craze in the digital asset space. Leveraging the same blockchain technology that powers popular virtual currencies such as Bitcoin and Ether, issuers are creating digital assets intended to serve as unique electronic certificates of ownership of intangible digital assets, such as digital art, music, sports memorabilia, or of tangible real-world collectibles.

Like traditional virtual assets, NFTs are digital tokens primarily issued on public, or decentralized, blockchains. They can be bought and sold in peer-to-peer transactions or through physical or decentralized platforms. They are often designed as so-called “smart contracts” that are programmed to automatically perform certain functions, such as forwarding a portion of each resale price to the original artist.

Transactions in NFTs are validated through a consensus mechanism that helps to ensure that each NFT is authentic and not an unauthorized copy. Unlike traditional virtual assets, however, each NFT contains unique information and cannot be directly substituted on a like-kind basis with other NFTs, as can Bitcoin with other Bitcoin or, in the real world, dollars for dollars.

NFTs can be electronically traded in a game by the participants first assigning a value to an NFT and exchanging like-valued NFTs for one another.

A Regulatory Patchwork and Unclear Laws

Collectors are buying and reselling NFTs with a fury. From a market capitalization of $41 million as recently as 2018, NFTs grew to a market capitalization of at least $338 million in 2020 and are on pace to substantially exceed that