The latest digital phenomenon, i.e. non-fungible tokens, or NFTs (also pronounced “nifty” or “nifties”) has been taking the world by storm. NFTs are assets held digitally with a unique code or PIN attached to it, in other words unique trading tokens. Similar to an original art piece, there could be prints for everyone to frame, but ultimately there is only one original NFT to trade with.
Why should I care about NFTs?
NFT’s are not air with a value attached to it. As an example: Long-play records evolved into CD’s then MP3’s and today music is available digitally via various platforms, including Apple Music, Google Play Music or platforms like Spotify. Beeple, a well-known living artist, recently sold digital art in the form of an NFT for US$69 million. This was hosted by the renowned auction house Christie’s, achieving the third most expensive art piece (fine art included) by a living artist. In addition, both Elon Musk and Kings of Leon recently released music in NFT format.
So, why should you care? Because an NFT is an asset, and although it is held digitally, it still forms part of your estate. NFT’s are underpinned by “smart contracts” on blockchain and akin to a normal buy-and-sell contract, the smart contract directs the terms and conditions attached to the NFT. It therefore should be thought of as a conventional asset to some extent, although there are novelties attached to NFT’s.
Tax and exchange control considerations
From a South African perspective, there are tax, exchange control, legal and fiduciary considerations of NFTs to keep in mind, which may be applicable on any given NFT transaction.
Capital versus revenue
Consideration should be given to whether the seller or buyer is trading in digital assets or whether the digital asset is part of his collectables. Is it revenue or capital in nature?
Estate duty, capital gains tax and liquidity considerations
As an asset in the deceased estate, capable of being bequeathed in the Will of the owner of the NFT, estate duty and capital gains tax may become payable, depending on the asset values in the total estate, the value of the NFT, and who it is bequeathed to. Provision should be made for sufficient liquidity in the estate to pay these taxes. Should royalties be included in the smart contract for the benefit of the original seller, an heir of the NFT would need to consider if they are able to continue with the payment of royalties to the original seller.
Exchange control considerations
For exchange control purposes, intellectual property forms part of “capital” which may only be externalised on obtaining South African Reserve Bank’s (“SARB”) approval. If intellectual property (“IP”) rights are included in an underlying smart contract and the owner thereof, a South African resident for exchange control purposes, sells the NFT’s IP rights to a non-resident, certain approvals would have to be obtained from SARB .
Fiduciary considerations
Introduction to fiduciary considerations
Accessibility to NFTs or cryptocurrency is vital to ensure that digital assets can be inherited by your intended heirs, including login details, passwords, private keys, unique codes and any other access information.
Fiduciary considerations
Looking at NFTs specifically, it is critical that the owner of the NFTs ensures that the executors of his estate are aware of the NFTs and have access to it upon his/her death or are able to provide access details to it to his/her heirs. Executors are generally able to contact institutions and, after providing the required documentation, obtain confirmation from such institutions whether the deceased held accounts/assets there and if so, obtain access to these accounts/assets. The challenge with NFTs is that they are not centralised and are held without a governing body or directory to request information from.
It is best to bequeath digital assets to specific heirs in your Last Will and Testament. However, although the executors should know about the digital assets in your estate and should be able to access it, it is best to keep the access details of your digital assets safe in a separate, highly secure document with password managing software or in a digital wallet, exchange or vault, although each comes with its own risks.
The future
It may be time to seize the new and exciting digital opportunities that are upon us. Digital assets in your estate planning have never been more important and we suspect its popularity and value will increase exponentially in the years to come.
We have done extensive work on the fiduciary, tax and exchange control aspects of NFTs and you are welcome to contact us for bespoke advice. There is not a “one-size fits all” solution and due care and consideration should be given to each NFT transaction and the underlying smart contract.
For fiduciary matters, please contact Marteen Michau at marteen@fidelisvox.co.za.
For tax and exchange control advice, please contact Suzanne Smit at suzanne@fidelisvox.co.za.
Profiles of the advisors are available on our website.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)