Legal Bulletins

Every day, there seems to be a new article on non-fungible tokens (NFTs).

What are they?

How do you create, buy or sell one?

Are there other applications for NFTs besides creating collectibles?

This article provides a brief introduction to the world of NFTs. For information on how to track your NFTs for tax and estate purposes, click here.

What Is an NFT?

An NFT is a digital certificate of authenticity and ownership for a unique digital asset that is stored on a blockchain. The digital file may have been created on the computer (i.e., as digital artwork, a photograph or video) or be a picture of a tangible asset uploaded to the computer (i.e., a picture of a sculpture, a baseball card or even a high-end sneaker). If the latter, after being uploaded, it may have been altered in some way to make it more unique, such as the addition of animation.

It is called “non-fungible” because it is unique, meaning no other digital asset can replace it. A fungible asset, on the other hand, is interchangeable. A common example is a dollar bill. Each dollar bill has the same value and purchasing power. Non-fungible assets are more unique, such as a land parcel, a baseball card or a diamond. No two are exactly alike or automatically have the same value.

What Makes an NFT Unique?

Taking a digital asset and “minting it” — registering it — on a blockchain creates proof of ownership and gives an NFT its unique identity. The blockchain records a title for the NFT, the creator’s name, and the date and time it was placed on the blockchain. This information is known as “metadata.” [i]

Once minted, there cannot be another NFT just like it. The creator can make and sell copies of the NFT, but they will not replace the original registered on the blockchain because the metadata cannot be duplicated.

How Do I Create or Buy an NFT?

To create or buy an NFT, you must open an account on a website that handles the minting process, such as Opensea, Rarible or Mintable. These trading platforms allow you to buy and sell NFTs. You also need a digital wallet, such as Metamask, Zilpay or Math Wallet, in which to store cryptocurrency, if you are using that to pay for your NFT transactions. Your digital wallet is accessed by using a very long password called a “seed phrase.”

You can create your digital asset (i.e., a picture or video) and have it minted to a blockchain (such as Ethereum) or buy an NFT. Categories include art, videos, sports, music, photography and trading cards.

Your NFT can be stored in your digital wallet. The actual NFT, however, is not stored on the blockchain, just the data describing it. If you sell an NFT, information about the transaction will be added to the NFT record on the blockchain.

The process for creating or transferring an NFT uses energy, so the websites handling the transactions charge a fee called “gas,” which covers the computing costs. [ii] Gas charges may be incurred when the NFT is created, sold or both.

Are NFTs Gaining in Popularity?

NFTs are growing in popularity due, in part, to the potential for financial gain. In March 2021, an artist called “Beeple” sold a montage of 5,000 digital illustrations, cartoons and sketches that he created on his computer during a 13-year period for more than $69 million. According to an article in The Washington Post, the bidding started at $100 and continued for weeks. [iii] The ultimate purchaser, a blockchain investor, paid for it in Ether, a type of cryptocurrency created by blockchain Ethereum.

Though Beeple was a known digital artist, the high level of bidding and the sensational sales price brought a lot of attention to NFTs and cryptocurrency, particularly Ether, all of which may have been intentional. Ether doubled in value during the next six months, and NFT sales of artwork jumped from $546 million in the first half of 2021 to $12 billion by the end of the year. [iv] However, the growth in the number of NFTs and the ease in creating one has lessened their exclusiveness, reducing prices for many of them. That has not lessened the interest in NFTs; just perhaps, the amount of financial gain.

If you have any questions about NFTs, please contact Ned T. Himmelrich or Lisa H. R. Hayes.

Ned T. Himmelrich
410-576-4171 • nhimmelrich@gfrlaw.com

Lisa H. R. Hayes
410-576-4070 • lhayes@gfrlaw.com