april2021 - 30

TECHNOLOGY IN PRACTICE

Picassos or Teeny Beanie Babies:
NFTs Providing " Ownership " of Digital Assets

HEADLINES OVER THE past few weeks have highlighted a dirge of high-profile sales of digital
assets via NFTs or Non-Fungible Tokens (also pronounced " nif-tees " ). For example, the rights to
a digital house on Mars sold for $500,000, a digital copy of the first tweet ever sent by Twitter's
Jack Dorsey sold for $2.9 million, and a digital collage created by Beeple was auctioned off

ROMAN H. KEPCZYK, CPA.CITP

Director of Consulting
Xcentric, LLC.
roman.kepczyk@cpapracticeadvisor.com

by Christie's for over $69 million, with sales completed in Ether (Ethereum cryptocurrency).
What makes these sales so
interesting is that the NFT buyer
purchased the rights to own a virtual asset, such as an image, video
clip, song, email or pretty much
anything that is in a digital format.
In many cases that exact same asset
can be searched for on the Internet,
copied, and shared as easily as the
original (think about sharing photos
you take on your smartphone). What
makes these digital assets unique
is that the creator/owner of the
digital asset chose to tie the asset
to an NFT which uses blockchain
technology to certify that the bearer
owns the non-commercial rights to
" the digital original " or to a " certified copy " (similar to what artists
do with numbering reprints of their
artwork). The benefit to the artist/
creator is they retain the actual
commercial and physical rights to
the artwork, but they directly earn
revenue from selling the digital
token.
The blockchain documents
the digital providence of the NFT
including the current and all previous owners, providing authenticity,
the amount of the sale, as well as of
course the bragging rights to prove
ownership to your friends. The NBA
has even gotten onboard by selling
highlight clip NFTs to sports fans
that want to " own " a favorite video
moment in basketball history. Think
of NBA Top Shot NFTs as being akin
to collectible trading cards where

APRIL 2021 ■

one superfan recently paid $208,000
for a LeBron James " Cosmic " dunk
NFT.
Similar to physical art, value is
perceived by the buyer/market and
acquisitions are made based on a
personal desire to own the digital
asset and/or as a speculative investment with the hopes of selling it for
a profit at a later time. Eventually
the market will have to decide the

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true value of NFTs and whether they
are Picassos or Teeny Beanie Babies.
However, with NFT sales skyrocketing, it won't be long before tax
ramifications come into play which
accountants need to be prepared for.
Considerations such as whether a
sale is subject to short or long-term
capital gains become increasingly
complex as NFT purchases are consummated with cryptocurrencies.

Most accountants (and the IRS) have
become increasingly aware that
sales involving cryptocurrencies
often come with complex valuation,
legal and tax jurisdiction questions
that have not been addressed before,
so expect to see NFT tax experts
and lawyers jumping in to espouse
on the topic by the time the fall
conferences come around. ■

http://www.CPAPracticeAdvisor.com

april2021

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