Non-fungible tokens (NFTs) have become a nearly $600 million market, helping creators monetize their works and generate long-term value. As the market continues to grow, understanding and leveraging the intellectual property (IP) rights associated with these unique digital assets is critical. But navigating the interplay between NFTs and IP is difficult.
In this article, we’ll look at how non-fungible tokens (NFTs) can help artists, companies, and investors drive long-term value – and some risks to look out for.
How to Protect Your NFT IP
Intellectual property (IP) refers to the legal rights that protect “creations of the mind,” including artistic works, inventions, designs, and symbols. In the context of NFTs, IP may include digital art, virtual goods, in-game assets, and more. Creators can leverage IP-protected NFTs to create unique or scarce items to buy, sell, or trade on various platforms.
There are three ways to protect IP:
- Copyright – Copyright law protects the rights of creators of original works. Creators typically retain the copyright even after selling an NFT, enabling them to enforce unauthorized uses of the digital assets.
- Trademark – Trademarks protect distinctive signs, logos, or symbols that identify a brand or product. Generally, creators of a collection may trademark the collection name to protect against knockoffs being generated and sold in NFT marketplaces.
- Patent – Patents protect inventions, processes, and new technologies, providing market exclusivity for the owner. While not applicable to most NFTs, patents may be helpful for businesses using unique technologies related to NFTs.
Unless specific language suggests otherwise, NFT buyers only own the ERC-721 token itself after a purchase. In other words, NFTs are similar to baseball cards in that the buyer owns only the card, not the player. Nor do they possess any rights to the player’s name or likeness. The only exception is if there’s specific language in the terms and conditions or source code.
Examples of NFT IP
Non-fungible tokens have become ubiquitous across collectibles, gaming, entertainment, and even fashion goods. Using these tokenized assets, brands can monetize their IP and drive long-term value. As a result, creators have new ways to earn a living, and buyers can invest in digital assets and even generate an income of their own.
Some popular use cases include:
- Digital Art / Collectibles – NFTs provide a decentralized and tamper-proof way to verify the authenticity and ownership of digital art and collectibles. As a result, artists can tokenize their digital creations as NFTs and monetize their IP through licensing or sale. They can also build resale royalties into NFT smart contracts, providing a portion of secondary market sales.
- Gaming and Virtual Worlds – NFTs offer a way to tokenize in-game assets, such as weapons or real estate, and share them across different platforms. As a result, game developers can leverage their IP to create unique and valuable items while building that value by trading them in cross- or off-platform environments.
- Fashion & Luxury Goods – NFTs can digitize physical footwear, accessories, and other fashion goods to bring them into virtual environments. High-quality, limited-edition NFTs based on a brand’s real-world IP can drive consumer interest and enhance brand value in virtual or augmented reality environments.
- Music & Entertainment – Musicians and record labels can tokenize their tracks, albums, or royalties. NFTs can also provide fractional ownership in film, television, and other media, allowing creators to monetize their works through sales, licensing, or royalty agreements with a broader customer base.
From the buyer’s standpoint, NFTs often derive their value from scarcity (in the same way as a rare baseball card) or utility. For example, an NFT’s utility might come from rights for NFT owners to access a private Discord channel or exclusive events. Or, NFTs could provide royalties or other financial incentives to their owners.
How to Maximize Value
Creators should start by registering their intellectual property, such as copyrights for digital art and trademarks for logos and brand names. That way, they can protect their creations and establish legal ownership. After completing these registrations, creators should monitor NFT marketplaces for infringements and prevent the dilution of their IP.
At the same time, brands with established IP may want to collaborate with artists, designers, or developers to create NFTs based on their existing assets. NFTs can help unlock further value in their IP, while cross-brand collaborations can combine IP and NFTs reach to unlock even more value. They can also use licensing and royalty agreements to generate recurring income.
For buyers, NFTs can provide a diversified source of income and potential capital gains. NFTs that pay royalties can generate a steady source of income for owners, while collectibles offer the potential for capital gains and may help diversify an investment portfolio. But it’s important to read the fine print to understand exactly what you’re buying.
There are a few risks to keep in mind, too:
- Legal Jurisdiction – The decentralized nature of NFTs creates legal jurisdiction challenges. After all, IP laws and regulations vary across countries, making it hard to enforce rights everywhere.
- Counterfeiting – The digital nature of NFTs make them easier to counterfeit than physical artwork or products. While creators should be vigilant, many NFT platforms react slowly to takedowns.
- Environmental Concerns – Many NFTs have a negative environmental impact thanks to Ethereum’s proof-of-work consensus mechanism. But fortunately, proof-of-stake alternatives are becoming more common.
NFTs may also trigger unexpected tax liabilities. Generally, creators must report any sale proceeds as ordinary income and secondary sellers must report any short- or long-term capital gains. In addition, individuals that receive NFTs as part of an airdrop may owe income tax on the value at that time – even if they become worthless at a later date.
The Bottom Line
Non-fungible tokens have become a $600 million market, enabling creators to monetize their works and generate long-term value. But as the market continues to grow, it’s essential to understand and leverage intellectual property rights. By keeping the tips and strategies we’ve discussed in mind, you can ensure your work is protected.
If you create, buy, sell, or trade NFTs, ZenLedger can help you track your assets and properly account for them at tax time. Our platform aggregates your NFTs and other crypto assets across wallets and exchanges, then computes your capital gain or loss. You can even auto-populate the tax forms you need to file each year.