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NFT Regulations For US Owners

Non-Fungible Tokens (NFTs) have been attracting owners from all areas of life since the crypto boom in 2021. Having started as digital art, now their uses expand across industries such as music, sports, fashion, events, marketing, and even real estate. 

With this, there are many questions about NFTs and defining their scope in legal terms, such as:

  • What do you actually own when you buy an NFT and is it legally a commodity and/or security asset?
  • Are there any unique NFT regulations for owners and traders in the United States, and if so, how are these regulations affected state-by-state?
  • What is the taxability framework and how vulnerable is it to money laundering and tax sheltering?
An NFT token compared to a $100 bill.

NFTs As Commodities

The current regulatory and legal framework was not intended to accommodate digital assets. That said, they may be classified as belonging to one or more asset types. 

NFTs might be considered commodities under the Commodity Exchange Act (CEA). Commodities are products and services that may be exchanged as articles of commerce. If NFTs were officially designated as commodities, they would be subject to the jurisdiction of the Commodity Futures Trading Commission (CFTC).

If an NFT were traded as a commodity in fully-funded, unleveraged transactions, it would have to fulfill the CEA’s anti-deceptive and manipulative trading criteria. Otherwise, if sold on a margined or leveraged basis and delivered after 28 days, it would have to be traded on a registered derivatives market. This year, bipartisan Senate groups proposed bills to classify certain crypto assets as commodities. In June, the Responsible Financial Innovation Act described stablecoins as “ancillary assets,” or “intangible, fungible asset[s].”  Later in August, the Digital Commodities Consumer Protection Act expressly classified Bitcoin and Ether cryptocurrency tokens as commodities. While these bills do not include NFTs for the time being, it is likely they will in the near future, as NFTs and cryptocurrencies are both blockchain-based assets that users and entities can sell and purchase.

Bitcoin and Ethereum

Can an NFT be a Security?

Additionally, NFTs may also be classified as securities. The Howey Test defines a security as a monetary investment that is expected to profit as a result of the efforts of others.

If sold, an NFT by a prominent artist or minted as a collectible might gain in value and yield a profit. However, an NFT is only a security if the rise is dependent on the activities of others. Alternatively, a fractional NFT (or f-NFT) could qualify as an “investment contract”, since the token belongs to a collective and each investor shares a portion of the ownership with others.

In this event, NFTs classified as securities would be subject to the 1993 Securities Act and the 1934 Securities Exchange Act. These regulations would limit NFT trading to licensed brokers and exchanges.

In the US, the Securities and Exchange Commission (SEC) is proposing the establishment of the Office of Crypto Assets, which will be responsible for analyzing crypto company filings. Simultaneously, SEC head Gary Gensler has stated publicly that the agency intends to regulate any digital asset that qualifies as a security.

The word "NFT" in a microchip landscape

Are NFTs Taxable In The Us?

NFT sales that result in profits or losses are subject to taxes like stocks and bonds. Owners must pay capital gains taxes if they acquire NFTs with fungible crypto, sell NFTs for fungible crypto, or trade one NFT for another. Creating a token, on the other hand, is not a taxable action.

Certain NFT markets have their own set of taxation laws. Sites such as OpenSea and Rarible consider any trading profits as personal income. Traders must pay income taxes ranging from 10% to 37%, as well as self-employment taxes of 15%.

Under the 2021 Infrastructure Law, all brokers require to record transactions for consumers and the Internal Revenue Service (IRS). Moreover, for any crypto transactions worth over $10,000 USD, these organizations will have to report the identity of the sender. This bill includes crypto exchanges such as Coinbase.

Person looking at NFTs

Anti-Money Laundering Regulations And NFTs

As of this publication, the Financial Crimes Enforcement Network (“FinCEN”) does not explicitly mention NFTs in US anti-laundering laws. However, the laws still indirectly cover these tokens according to terminology. These laws include the 2021 Anti-Money Laundering Act (AMLA) and the National Defense Authorization Act (NDAA) for fiscal year 2023.

The AMLA applies to all financial institutions, including enterprises involved in the medium of exchange that substitutes for currency. This term applies to crypto marketplaces. Furthermore, the AMLA extends the 1970 Currency and Foreign Transactions Reporting Act (commonly known as the Bank Secrecy Act) to anybody who deals in art, regardless of media.

NFT Regulations Across The States

Just as federal law does not incorporate NFT-specific regulations, the same applies to state laws. Regardless, states like New York and Louisiana do have rules and regulations governing enterprises involved in digital currency operations. Companies that issue, exchange, transfer, control, and/or administer virtual currency in these states must get a license or charter, and post surety bonds, or fund an account in order to safeguard clients.

The US government appears to be paying more attention to fungible assets, such as stablecoins and other well-known cryptocurrencies. At the moment, NFTs fall into more general definitions, such as artworks or digital assets. Nonetheless, it is a good idea to stay alert on any legal definitions and implications that may have an indirect and, in the near future, direct impact on trading and owning non-fungible assets.

NFT and AML

Sources

https://bit.ly/3BcuWEK

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https://bit.ly/3BAU3Tm

https://bit.ly/3BaFsMR

https://bit.ly/3U6OaEm

https://bit.ly/3Ub30tR