What are NFTs and how do they function?
NFT stands for a non-fungible token. “Non-fungible” more or less means that it’s unique and can’t be replaced with something else. It is a digital asset that represents real-world objects like art, music, in-game items and videos.
Most common NFTs are images, music and videos. But this does not mean that NFTs are limited only to represent these types of art. There are gaming NFTs and even precious goods NFTs.
Legal aspects of NFTs
As any new form of technology, the legal framework is lacking behind or is still in early stage of development and somewhat implementation in some states. Catching up proves to be a serious difficulty for lawmakers, who should meet social relations in an extremely dynamic field.
In the EUs there is a proposal for Regulation on Markets in Cryptoassets, MiCA. The MiCA Regulation does not cover directly NFTs but the latest version makes it clear in the recitals that the fractional parts of NFTs should not be considered unique and would therefore be subject to MiCA. The proposed Regulation should explicitly apply if the NFT grants to the holder or its issuer specific rights linked to those of financial instruments, such as profit rights or other entitlements. In these cases, the tokens may then be assessed and treated as “security tokens”.
Major areas of concern are: indirect tax – will the NFTs be subject to VAT in comparison to the cryptocurrency, should royalties be due, how should the income from NFT be treated for the creator of the NFT – e.g. as an income from copyrighted object or else. Most of these remain unanswered for the time being. As with crypto currency the more use will lead to accumulation of case law and new legislation which little by little will provide somewhat a legal framework for this fast-paced industry.
NFT Ownership – legal aspects
There is significant difference between owning an NFT and a cryptoasset. Who is the owner of an NFT for an artwork that was tokenized without the author’s permission? Who is the owner of an NFT that the author created subsequent to the sale of a first NFT for the same object? There is no clear and concise answer to any of these questions.
VAT on NFTs
Currently, there is clearly uncertainty to the application of VAT to NFTs. NFTs are not equivalent to cryptocurrency and VAT cannot be dismissed 100%. NFTs can be considered as digital service under the EU and if so, then VAT will be applicable. Still, it is very early to give answers to this question. New EU legislation and the VAT Committee will have the task to implement the type of indirect taxation for NTFs. It will be easier to have a common VAT principle on NFT all over EU, than each member state to initiate its own tax regime on the NFTs.
Income tax
As with the other matters income tax from NFT trade is a grey area. Some countries apply the cryptocurrency approach – for example Australia which by the has a neatly structured info page for NFT income tax [1]. I wish all tax administrations used this approach to communicate taxes with the tax subjects.
NFT and copyright
NFT can be anything if it can be digitalized. Any art form that can be digitazlized can become an NFT. So, there comes the question is copyright applicable to NFT. And you guessed it, there is no definite answer to this question, either. The art form used in the NFT is only in the first stage so basically the creator still has the original work which may not even be in digital format itself. This does not mean that all NFTs are not copyright protected. The more the market grows the more cases there will be to examine the implication of copyright protected NFTs. Some creators offer to transfer the copyright ownership of the original work.
And do not forget the aspect of copyright infringement of original works of creators which were digitalized to NFTs in violation of copyright protection.
These are some of the main points raised at the moment. There will be many more. New legislation could possibly solve some of the problems, but many will stay ambiguous.
Our team will continue following the latest trends and keep you updated on the developments in the legal framework of NFTs.