The legal classification and rights associated with Non-Fungible Tokens (NFTs) vary depending on the context and use. NFTs are generally viewed as digital assets or property, which suggests that NFTs can be bought, sold, and exchanged in the same manner as property more broadly. However, while an NFT may be sold in connection with intellectual property such as digital art, the sale itself does not imply ownership rights to the underlying copyright unless expressly noted in the sale. Additionally, ownership of an NFT is not likely to include a right to reproduce or distribute, or to exploit the underlying asset commercially. NFTs also raise questions with respect to securities law. If an NFT has characteristics analogous to an investment contract such as fractionalized ownership and/or profit-sharing interests, then the NFT will be classified as a security and would become regulated by the SEC. For tax purposes, the IRS treats NFTs as property and sales of NFTs carry capital gains tax depending on profits realized and length of time held.
Moreover, while the NFT market has great potential, it is also high-risk in terms of consumer protection, addressing fraud, deceptive claims, or the selling of counterfeit NFTs which could fall under deceptive trade practice laws. Because NFTs are primarily operated under smart contracts, legal challenges occur if the smart contract is flawed, or if there are disagreements about the performance or terms of the smart contract. Since the market is ever-developing, further regulations will also likely develop in the future on these complex issues surrounding NFTs.