If You Can’t Touch It, Is It Really Art?

Painting of a sunflower. West Financial Services.

You know how your Apple iTunes library is not really music you own, even though you paid for it? Yet your vinyl collection somehow now has some appreciable value? Or did you ever collect baseball trading cards? And now you see that these cards exist in the digital world and are being traded at high values. These comparisons are kind of how I view the concept of non-fungible tokens (NFTs), relative to the tangible items that defined our childhoods. In our previous blog post regarding art we focused on traditional and tangible art forms and their intrinsic and extrinsic values. However, there has been a frenzy in recent years surrounding NFTs as art collectibles. If you don’t know what an NFT is, it is a virtual image, sometimes of a tangible art piece, but often of digital art, and the original underlying code. An NFT is unique, cannot be traded like for like and has traceable provenance. According to Barrons, “An NFT, once assigned by an accepted blockchain clearinghouse, attaches to the digital artwork permanently and marks it as original, official and unique.” 

While NFTs came into existence around 2017, they didn’t really gain popularity until 2020 and 2021. The first real evidence of the medium’s extrinsic value was the 2021 sale at auction of a digital collage “Everydays: The First 5000 Days” by the artist known as Beeple for $69 million. This landmark sale opened the doors for digital artists to a much wider range of patrons. Where the conventional art world is highly rarified, the NFT art community allows a great number of artists to participate in the profitable sale of their works online. Unlike traditional art mediums, this one is accessible to many more artists and provides more control over the artwork. For example, the digital art accompanying this blog post is called “NFTy Daisy” and was created by the author’s husband, David Forbes.

There are challenges though, first in the form of criticism for the environmental impact associated with blockchain technologies in general. The complicated issues surrounding copyrights also come into play, especially when an NFT represents a reproduction of physical art. And while the democratization of art through NFTs is a good thing, some have argued that values are based more on speculation and not real artistic talent. 

To that point, in an age where you can Google most, if not all, digital images and get a copy on your desktop, you might be wondering where is the value of an NFT? As it is with cryptocurrency, the answer to that question may not be the most satisfying one. It appears that the value of an NFT is whatever someone is willing to pay for it. And while that is true of pretty much everything to some extent, the fact that what you own does not always have a physical manifestation (that you also own) makes it a little harder to conceptualize. But this idea of control over an image or piece of art, whether tangible or not, is what translates to its value for interested buyers.

Investors should be aware of some aspects of NFT ownership that could impact their taxes. As of March 21, 2023, the IRS has classified many NFTs as collectibles, which has a big impact on taxation. Most investment assets are taxed at favorable capital gains rates when sold after a one-year holding period. However, collectibles are taxed at the maximum capital gains rate of 28 percent. While there are still many questions around the taxation of digital assets, we can assume that an NFT that is considered art is a collectible and that the IRS Notice 2023-27 implies the maximum capital gains tax rate.

Personally, the concept of owning something for the sake of ownership doesn’t have much appeal. I’m also skeptical of assets being valued by the masses, without any real appraisal to support valuations. But the fact that more artists are being allowed to make a living creating art is a definite positive. At least if I buy an NFT, I won’t have to worry about not having enough wall space to display it.

Meet Kristan Anderson, CEBS®, CFP® | Dir. of Retirement Plan Services & Dir. of Financial Planning. »

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