Art

Web 3.0: Planning For Art NFT Collectors

Matthew Erskine, February 4, 2022

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NFTs are popular in applications which require unique digital items, including crypto art, digital collectibles and online gaming, where some guarantee of authenticity and ownership history adds value. As far as art is concerned, the space is developing rapidly. This article takes a look at the territory.

The distributed ledger technology of blockchain is most commonly associated with bitcoin and other “cryptos,” but the use of such tech reaches much wider. An example is non-fungible tokens, which are non-interchangeable units of data stored on a blockchain that can be sold and traded. Unlike cryptocurrencies, which are identical units that can be exchanged and are therefore fungible, NFTs are not interchangeable. Each NFT is a unique token on a blockchain which stores information about provenance that can be traced back to the original issuer; therefore, it provides collectors with the opportunity of building a digital collection. For this reason, NFTs are popular in applications which require unique digital items, including crypto art, digital collectibles and online gaming, where some guarantee of authenticity and ownership history adds value.

In this article, Matthew Erskine, managing partner, Erskine & Erskine, a US law firm, examines the legal territory applying to art NFTs and what the risks and rewards are. The editors are pleased to share these views on the topic and invite responses. The usual editorial disclaimers apply. Jump into the conversation! Email tom.burroughes@wealthbriefing.com

Web 3.0 will have a profound impact on the way everything is done as everything becomes tokenized. The first harbinger of this revolution is the passion for art NFTs. There is more to collecting than meets the eye, especially for art NFTs. Not only are there very personal reasons for collecting, but there are also unanswered questions on the way NFTs are handled for tax purposes as well as their meaning in a cultural context. This is a whole new world for estate planning. 

Why do people acquire art NFTs? Although the promise of instant wealth and fame is always alluring, the current popularity of collecting art NFTs may also reflect modern anxieties about capitalist consumer culture. The idea that eventually all digital images, no matter how ephemeral or mundane, will become valuable and collectible seems to make consumerism more meaningful. The result is that people will buy art NFTs not simply as a consumer but as a collector.

People collect art NFTs for all kinds of reasons. Some collect in a way that instructs us about the nature of the world; some collect in a way that reflects a sense of nostalgia of a lost childhood; some collect to represent fantasy worlds, lost worlds or worlds distant in time and space. Collecting is a narrative process: objects become symbols and require a collector to narrate its meaning. Some collections become sites of familial and cultural memory. By collecting art NFTs, people will be able to continually negotiate their relationship with the actual and virtual world as it is shaped by new technology. Indeed, Web 3.0 lends itself to collecting. Collecting is quintessentially an interior action and digital assets will be taken out of circulation and brought “inside” the blockchain based on its relationship to the collector. The collection, much like art, is taken out of the public domain and displayed in private. The spectacular sales of NFTs will soon be replaced by the sale of access to virtual collections though ticket NFTs as the main source of gain.  

As virtual collections of digital assets develop, so will the interplay of the virtual and physical spaces where they are displayed. As data registered on the blockchain and tokenized, the smart contracts will define what is public information, what is agreed upon information on a consensus ledger; and what is private information and kept secret. Art NFTs can mathematically enforce what is public and what is private, what is domestic and what is not; and, how the display of collected NFTs reference the creator, the collector, inside your virtual home and the digital world outside.

Expect to see similar inquiries into art NFTs as are raised about the political nature of art collecting. Does the collecting process permit (or even encourage) a kind of objectification or "othering" of humans? When the digital image stops being defined by its function – that is a virtual record of an object, event or creative idea – its meaning is entirely up to the person viewing the object. The result is that all objects in a collection have one common denominator: the passionate abstraction called possession. The result is that the collection becomes more valuable than the sum of its parts. In order to preserve this value, specialized planning is required, adapted to the challenges of the swiftly changing environment which is becoming Web 3.0. 

Planning for art NFT collectors requires an understanding both of the art market and the art NFT market. This includes how people behave when collecting, the advisory process for collectors, the specialized aspects of managing digital assets, the tax and non-tax issues involved in transferring ownership and control of art NFTs, the income taxation of art NFT transactions, gifting NFTs and planning the sale of NFTs either individually or as a collection. 

People will collect art NFTs and those NFTs will endure beyond their lifetime. This is a new world for clients and for advisors, one that has yet undefined risks. It requires both expertise in estate planning and expertise in managing digital assets.  Estate planners have experience in the first area, and we are working hard to acquire expertise in  the second. 

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