In the U.S., there are no specific regulations for NFTs or cryptocurrency in the gaming space. Most regulation considers the specific circumstance of how the cryptocurrency or NFT is being used. The details of how an NFT is marketed, purchased, or sold are all factors that would be considered in determining what laws and regulations require compliance for a legitimate business involving Axie Infinity in the U.S.
Consideration of these factors provides guidance in determining which, if any, existing U.S. financial regulatory laws need to be complied with regarding NFTs, such as the Anti-Money Laundering Law (“AML”) or Securities and Exchange Commission (“SEC”) laws and regulations.
Our team offers a wide range of services for individuals considering an NFT offering:
- Compliance with SEC, FinCen (Financial Crime Enforcement Network), and state laws concerning virtual currency
- Anti-money laundering and money-transmission compliance
- Structuring sale of NFTs as regulated securities
- Tax planning for NFT transactions
- Intellectual property governance, including royalties
- Setting up corporate entities and LLCs to hold NFTs
- Asset protection strategies
- Consultation on the most advantageous platforms and blockchains for NFTs
- Implementation of smart contracts for blockchain transactions
NFT offerings can be structured to meet the needs of various asset classes. Our team can assist with converting a wide range of art into a non-fungible token. These include:
- Digital and non-digital art
- Gaming collectibles
What is happening in the NFT world?
Perhaps it was the announcement that Christie’s would hold its first auction of digital art with a piece expected to sell for more than $20 million, or it could be the burgeoning interest among investors and art lovers in owning a unique artistic creation that exists within a crypto wallet. Nevertheless, this is one of the more remarkable developments within the crypto sphere, and it is a clear reflection of just how “virtual” our daily lives have become.
Headlines about multi-million-dollar NFT sales have begun to eclipse the incredibly rapid ascension of Bitcoin, with history-making sales of digital art tokens being one of the biggest breakthroughs of early 2021. According to a recent market insight report from NonFungible.com, NFT trading in 2020 was valued at more than $250 million, an increase of nearly 300 percent over the prior year.
Platforms such as OpenSea, Nifty Gateway and Rarible are seeing more and more people willing to pay large sums of money or cryptocurrency to purchase tokens representing ownership of digital art and other non-fungible objects, which may be reauctioned at a later date at higher prices.
Fungible vs. Non-Fungible Tokens
One way to understand the distinctive nature of non-fungible tokens is to compare them to ordinary dollars or bitcoins. Unlike the typical interchangeable and divisible “fungible” tokens, which can be divided into smaller units, non-fungible tokens were developed according to Ethereum’s special standards, specifically ERC-721 and ERC-1155, making them unique and indivisible.
By implementing these new standards, non-fungible tokens have solved the problem of monetizing digital artwork, thereby opening doors for a medium that is unrestrained by physical limitations. For the first time, a standard has been set forth enabling “verifiable digital scarcity”. The ERC-721 standard empowers UCA holders in copyright-intensive disciplines, such as collectibles and gaming, to maintain intellectual property rights over their cryptographic creations.
Because their value is rather subjective and they cannot be sold off in pieces without spoiling the “whole”, NFT’s are a good metaphor for most modern art. However, their unique structure opens up dozens of questions about how they will be policed.
Creators and investors will be asking the same questions about taxation, intellectual property rights, and how the transfer of digital art “tokens” will be regulated. When an original piece of art still exists in its physical form, how will the tokenized asset stand on its own?
What issues might arise in an NFT offering?
The structure of NFTs—modeled after artwork rather than currencies or shares—implies they are not subject to the same financial regulation as other types of crypto, but they still risk falling afoul of intellectual property law and consumer protection laws.
Anyone who is entering the world of NFT art will need to seriously consider it from the perspective of taxation, corporate structure, and intellectual property.
- Will transfers of such tokens be subject to a gift tax or viewed as purchase transactions?
- How will the token be valued separately from the physical property it represents?
- Which rights will the eventual owner be given for the potential display of the artwork?
Our cryptocurrency compliance and taxation attorneys are prepared to answer these questions and more. It is our goal to ensure that our clients’ NFTs are properly structured to reduce tax liability while continuing to earn royalties for their creators.
As industry-leading legal consultants specializing in cryptocurrency and blockchain technology, the Dilendorf Law Firm is connected with the latest developments in the world of digital assets. We work diligently to help clients comply with federal and state regulations while protecting their interests through sound asset protection and intellectual property strategies.
Anti-Money Money Laundering Regulations
Concerned that those who engaged in money laundering were using money transmitting services instead of traditional financial institutions, Congress enacted 18 U.S. Code §1960 to make knowingly participating in an MTB a crime punishable by a fine, up to five (5) years in prison, or both. Under this statute, the failure to register and follow FinCEN regulations is a criminal offense. And it is under FinCEN regulations that MTBs become obligated to comply with the Bank Secrecy Act’s anti-AML regulations.
Taxation of Digital Assets and NFTs:
- Virtual Currencies | Internal Revenue Service
- IRS Guide to Related Tax Consequences of Buying, Holding and Selling Bitcoin/Cryptocurrency
- Frequently Asked Questions on Virtual Currency Transactions
- Bitcoin and Beyond – Texas Comptroller
- Tax Treatment of Transactions in Cryptocurrency and IRS Tax Enforcement
- IRS Private Letter Ruling on Taxation of Hard Forks and Airdrops
- Understanding the Tax Basics of Virtual Currency
- Virtual Currency: IRS Issues Additional Guidance on Tax Treatment and Reminds Taxpayers of Reporting Obligations
- Publication 525, Taxable and Nontaxable Income, for more information on miscellaneous income from exchanges involving property or services
- Publication 526, Charitable Contributions, for more information on charitable contribution deductions,
- Publication 544, Sales and Other Dispositions of Assets, for more information about capital assets and the character of gain or loss
- Publication 551, Basis of Assets, for more information on computation of basis
- Publication 561, Determining the Value of Donated Property, for more information on the appraisal of donated property worth more than $5,000