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Proliferation of NFT Transactions Raises Numerous US Tax Questions

Questions

The Contemporary Tax Journal

Volume 10, Issue 2 The Contemporary Tax Journal Volume, 10 No. 2 – Summer 2021, Article 6

8-25-2021

Nathan W. Giesselman

Carl R. Erdmann

David Berke

Martin de Jong

Video: NFTs, Explained

Recommended Citation Giesselman, Nathan W.; Erdmann, Carl R.; Berke, David; and de Jong, Martin (2021) “Proliferation of NFT Transactions Raises Numerous U.S. Tax Questions,” The Contemporary Tax Journal: Vol. 10 : Iss. 2 , Article 6. https://scholarworks.sjsu.edu/sjsumstjournal/vol10/iss2/6

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1. Proliferation of NFT Transactions Raises Numerous US Tax Questions
   1. Background on NFTs

*Reprinted with permission of the authors and Skadden Arps. *

Background on NFTs

With the market for nonfungible tokens (NFTs) exploding, NFTs attached to art, music, video clips, tweets and other digital collectibles have sold for significant sums: An NFT of an animated flying Pop-Tart cat sold for $600,000, and an NFT from the artist Beeple was auctioned for $69 million. Demand for such tokens does not appear to be slowing, and the Internal Revenue Service (IRS) and state tax authorities undoubtedly have (or will) take notice.

An NFT is a digital certificate of certain rights associated with an asset. NFTs are usually associated with digital assets, but NFTs representing rights to physical assets or experiences have also been minted. For example, the band Kings of Leon minted an NFT giving the holder the right to frontrow concert tickets, and tennis professional Oleksandra Oliynykova auctioned an NFT for the right to determine what tattoo to put on her arm.

As other authors have described, for example, in a March 30, 2021, Bloomberg Law article, “NFTs Raise Novel and Traditional IP and Contract Issues,” NFTs raise a multitude of intellectual property (IP) and contract law issues. As for tax considerations, while each NFT transaction may differ, two points are generally applicable. First, given the novel nature of the transactions, NFT minters, purchasers and platforms that allow users to buy and sell NFTs must consider a host of U.S. tax issues. Second, no direct guidance is currently available to resolve those issues, so open questions about the tax treatment of NFTs abound. The discussion below outlines a few of the more salient tax questions relevant to NFTs and considers how existing guidance could be applied to analyze them.