NFTs – What is an NFT and what are the implications of NFTs on estate planning
With the digital revolution well under way, and blockchain technology, crypto currencies and now digital art in the form of a non-fungible token (NFT) slowly becoming more accepted by the mainstream, it is important to understand the impact these assets have on your estate.
In this article we explore the realm of NFTs, considering their recent popularity, in an effort to create awareness as to what an NFT is, the legalities and development of regulation around NFTs and their impact on your estate – including tax and exchange control implications in South Africa.
What is an NFT?
An NFT is a unique digital token used to digitally record transactions, commonly using the Ethereum blockchain. It is not a crypto currency like Bitcoin or Ethereum, but rather a token linked to a unique digital asset from which it derives its value. With all the hype it is important to understand what the word fungible means, it means interchangeable and, despite the pronunciation, is not related to mushrooms. A non-fungible token then refers to an exclusive item, which is different from bitcoin and Ethereum as these items are fungible and can be exchanged in turn. The result of the non-fungibility is that an NFT becomes comparable to an original art piece.
For example, the first NFT – was linked to art sold at Christie’s auction house in New York, a collage of images by digital artist Beeple, for $69 million.
NFTs are also becoming increasingly popular in the music industry for their ability to be tracked to purchasers and to link royalties to musicians. This is putting a lot of power back in the hands of musicians who struggle to track royalties.
NFTs are recorded in a digital ledger in the same way as cryptocurrency, so there’s a listing of who owns each one. An NFT can also add multiple buyers.
Why are NFTs relevant to estate planning?
Let’s expand on the example of an original art piece. Each painting by Vincent van Gogh is unique and particular to his art style. Hundreds of years after his death we are still able to identify an original van Gogh by his particular brush strokes and style, and we attach immense value to his work.
An NFT is similarly unique and therefore valuable, underpinned by smart contracts on blockchain. NFT’s are akin to an asset in your estate. This is important because an NFT will increase the value of your estate. If not taken into consideration, you could ultimately be faced with exchange control issues or liquidity issues in your estate upon death.
While it may appear NFTs and digital currencies can’t be traced, regulatory structures in the digital market are being developed and implemented globally. The Financial Sector Conduct Authority (FSCA) has issued a draft declaration on crypto assets, which will ensure more stringent regulatory methods are imposed on crypto service providers, including platforms, intermediaries and custodians.
Does buying an NFT mean you own the asset?
This is where NFTs are interesting. An NFT has been likened to an asset in your estate above. This is because an NFT is either a unique piece of art itself (for example) or is linked to a particular piece of art or music. Ownership of the item attached to the NFT (either a song, a video, an art piece etc.), however, does not pass and is governed by copyright laws which can be licensed to the purchaser through the NFT. This protects the artist and ensures there is room for royalties to continue to be paid.
What to consider for tax and exchange control
An asset in a deceased estate will attract estate duty and potentially capital gains tax and an NFT is no different. An NFT can therefore create a liquidity issue in an estate. If not provided for, your intentions recorded in your will cannot be properly met. If there are royalties associated with the NFT, the beneficiary needs to be aware of this. Should the NFT be bequeathed, the details of the NFT need to be properly recorded and kept safe for transfer purposes. Immediate tax issues should also be considered.
If an NFT is externalised, the IP is considered “capital” and value is attached to the asset. South African Reserve Bank approval will be required.
The way forward
Digital assets are globally becoming the new normal due to their originality and veracity. There is high potential interest in digital assets, which is expected to increase in the coming years. Whether you intend to invest in the digital market, or have already invested, it is important to understand the implications of these assets on your estate and plan ahead to avoid unforeseen liquidity issues. As a start, it is important to understand that there are implications to trading these assets, as well as tax and exchange control regulations which may apply.
Ensure you are ahead of the curb. Obtain advice regarding how these assets will be dealt with in your estate and how you can plan for the future.
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ABOUT THE AUTHOR:
Savannah Solomons
Savannah Solomons is an LLB Graduate of the North West University (NWU). She practices in the commercial field and has experience in transactional work such as mergers, acquisitions, joint ventures, due diligence, compliance investigations and reports. She has worked for large corporates as well as multinational companies.
