With the significant increase of values of cryptocurrencies in recent months, CryptoArt has also received more attention. The consequence is that the creators of CryptoArt, but also those who only trade with it, are generating more and more income.

Non-fungible tokens (hereinafter: “NFT“) attract the most attention when we speak about CryptoArt, and primarily because some NFTs are sold within specialized NFT marketplaces for huge amounts expressed in cryptocurrencies.

What is NFT and how is it created?

The basis of each NFT is a certain digital content, i.e. a certain artwork in digital format – graphics, photography, audio or video recording, etc.

Every artist can create NFT from its artwork that is in digital format. For that purpose, he needs to own a digital wallet and connect it to the NFT marketplace where he wants to place his CryptoArt.

The artist should place artwork in digital format (e.g. photography) within the NFT marketplace (OpenSea.io, SolSea.io, etc.), then invest a certain amount of cryptocurrency from his digital wallet to “mint” the artwork and create an NFT – non-fungible token, and at the very end of the process he gives a detailed description and determines the value of NFT in the cryptocurrency that is used within the NFT marketplace.

Such token is unique because there are no two (2) identical NFTs within the marketplace on which it was created. Even if the artist publishes two (2) NFTs without clear physical differences, metadata implemented during the minting process in each NFT individually are not and cannot be the same, which makes them indisputably different. However, the artist can always “burn” (delete) the NFT he has created. Thus, the essence is that each NFT is actually token with implemented unique metadata associated with a particular digital content.   

How to trade with NFTs?

After the artist creates NFT and sets a price for it, NFT can be sold for that price or possibly through auction system, if there is a possibility of organizing an auction within the NFT marketplace. The buyer and also the new owner of NFT then decides whether to hold or also offer it for sale within the same marketplace. It is important to note that the person who initially created the NFT can earn royalties on each of its subsequent sales, in the percentage he determined during the NFT creation process.

So, in addition to the creator of NFT, every potential buyer also needs a digital wallet, as well as to have certain crypto assets on it, in order to be able to access the platform and buy some NFT.

However, as clear as the procedures for creating and trading are, there are certain legal doubts regarding intellectual property, but also when it comes to their tax treatment.

It is clear that the artist has intellectual property rights over the artwork, which is the basis – i.e. the digital content of NFT. Therefore, a distinction should be made between the following persons: (i) the artist who created an artwork in digital format, (ii) the person who created the NFT by minting the artwork in digital format on the NFT marketplace, and (iii) the owner of NFT.

Regarding the protection of intellectual property, there are no potential issues when one person is the author of the artwork and at the same time the creator and owner of NFT until the moment he sells it. Practically, the blockchain technology and the regulated NFT marketplace enable the artist to protect his copyright over digital artwork by creating NFT and to determine the scope of copyright that he will transfer to the buyer.

However, if a person who is not the author of some artwork, without any authorization places that artwork on the NFT marketplace and creates NFT, sells it and earns economic benefits, and additionally receives royalties from each subsequent sale, it is clear that this is a copyright infringement.   

In such cases of copyright infringement, it is not easy to initiate appropriate proceedings for damages due to the anonymity provided by blockchain technology. Namely, the data implemented in the NFT are: (i) the digital wallet address of the person who created it, and (ii) the data on each transaction related to that NFT – date, price and address of the new owner’s digital wallet. In practice, the biggest challenge is finding out who is hiding behind a particular digital wallet address.

If the owner of the digital wallet is careful when using it, it will be difficult to find out his identity, however in certain situations it happens that the owner himself discovers it. For example, if he receives donations on his website in the form of cryptocurrencies, then it will be easier to identify the owner of the digital wallet or if he makes a payment in a cryptocurrency to a certain company, and then leaves personal data in order to receive some goods and/or services from that company.

Therefore, although blockchain technology provides protection to artists who sell their digital works within the NFT platform, the question arises as to what artists who are not fond of CryptoArt should do. In their interest would be to act preventively and in any case to adequately protect their copyrights over the digital artwork, which could potentially end up in an unwanted way on one of the NFT platforms.

On the other hand, tax aspect of NFT is also interesting since NFT can be defined as a combination of copyright and digital assets. Bearing in mind that the non-fungible token is not explicitly defined by the Serbian Law on Digital Assets, but can certainly be considered as digital asset, with the fact that it also contains an artwork in digital format, the dilemma is justified as to which NFTs’ feature should be given priority. As digital assets and artworks do not have the same tax treatment, it remains to be seen how the Tax Administration will approach regarding taxation of income generated in transactions of a particular NFT, but also with the use of possible tax exemptions in that regard.

In the coming period, we can expect that NFT will be even more widely used around the world, which will probably affect the arising of some new legal issues and doubts, but we also believe in resolving the existing ones. Therefore, we will continue to closely monitor legal practice and trends in the field of blockchain technology.

Author: Goran M. Ćiraković, Attorney-at-Law

Photo: Pixabay