NFTs (non-fungible tokens) are unique digital files that have become the fastest-growing segment of the art world. These assets' high value and speculative nature make them items that must be carefully assessed in a divorce.
What Is an NFT?
NFTs are digital items of value created on blockchain, like cryptocurrency. However, cryptocurrency does not exist as unique items while NFTs do. If you think of cryptocurrency as pieces of money, every 2022 nickel has the same exact value. They are absolutely interchangeable, and so is cryptocurrency.
NFTs are NOT interchangeable because each one is the first and unique digital file for that item. NFTs are like original pieces of artwork. Other people can have copies of that piece of art that look exactly the same, but there is only one original. You may not be able to tell the difference by looking at them, but the original is different and extremely valuable.
NFTs can be very expensive. Grimes sold a group of NFTs for millions. Jack Dorsey sold his first tweet for $2.9 million. Beeple’s Everydays sold for $69.3 million. The Merge by Pak is the most expensive NFT sold to date, going for $91.8 million. Total sales of NFTs in 2021 hit $25 billion. There is no question that the NFT market is surging. However, because it is a new area of investment, it is unclear if NFTs will hold their value and continue to be a good investment.
Digital Assets and Divorce
Digital assets have been an important part of divorce for many years. Photographs, movies, ebooks, music, documents, and cryptocurrency are regularly included in the assets considered and divided in a complex divorce. As with any other asset, the first issue is whether the item is a separate or marital asset. Marital assets are those acquired during the marriage. If the item is a marital asset, it must be valued to establish a fair current worth at the divorce. That item is then included in the total value of marital assets, which are divided.
In New York state, marital assets are divided in a way that is fair but not necessarily fifty-fifty. Digital assets are like artwork or a piece of furniture in that they cannot actually be divided like a bank account can be. Instead, the item must either be sold, or one person will take that item as a portion of their total take in the divorce.
Unique Nature of These Assets
NFTs are a new and unstable type of asset which have not been tried and tested in divorce settlements.
There are several issues that make them challenging to identify and value in a divorce:
- Anonymity. Identities can be masked because NFTs are purchased through blockchain, so it can be difficult to identify purchases a spouse has made and is trying to conceal.
- Smart contracts. NFTs are purchased with smart contracts which continue to generate royalties for the artist, may trigger sales if the assets reach a certain value, and may allow replication of the assets. This contract can also be set to actually execute the sale after the divorce is complete, making it difficult to identify and make valuation a challenge.
- Fluctuations in value. The valuations of NFTs are very volatile, so the value could be quite low at the time of the divorce then skyrocket immediately after.
- Taxation. The tax status of NFTs is not clearly delineated at this point, and they may or may not be handled as taxable securities. The ultimate taxation of the asset significantly impacts its value.
NFTs can be used to hide assets and divert funds away from the marriage, and because of this, they are items of high scrutiny in complex divorce cases. If your spouse may have purchased NFTs, these are the signs that may indicate this:
- Your spouse follows NFT accounts on social media. An indication that your spouse is interested in NFTs can be an indication that they have purchased or are considering purchasing them.
- You have lost access to joint bank accounts you previously could access. If your spouse has changed passwords or made it impossible for you to access these accounts, it is a warning sign that the funds could be used to purchase NFTs and other issues.
- Large withdrawals or regular withdrawals from accounts. A large withdrawal that has not been explained or regular smaller withdrawals can indicate NFT purchases.
- Crypto exchange or digital wallet apps. If your spouse has these apps on their phone, they may be using them to purchase NFTs.
If you suspect your spouse has purchased or is considering purchasing an NFT, it is essential that you discuss this with your attorney. Your lawyer has trained professionals who can determine what kinds of purchases your spouse is making and ensure that they are accounted for in your divorce. Contact us today online or at 212.682.6222.