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Home»NFT»1 way to revive dead NFT wallets
NFT

1 way to revive dead NFT wallets

2023-11-22No Comments8 Mins Read
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Every NFT collector’s nightmare is losing their seed sense. It’s hard to watch a hacker steal your non-fungible tokens (NFTs), but it’s harder to see them sitting in a dead wallet because you have no one to blame but yourself.

Worse yet, stolen NFTs can be recovered, but a dead wallet is forever. The NFTs are still yours, but you can’t sell them because you can’t transfer them to a buyer’s wallet.

Brian Frye is a professor at the University of Kentucky College of Law, NFT artist, and filmmaker.

How much is an NFT worth in a dead wallet? Everything and nothing. The NFT itself hasn’t changed, so presumably its value hasn’t changed either. After all, it still represents ownership of the same work of art. And yet an NFT you can’t sell is functionally worthless. Can you at least still enjoy the art?

While a dead wallet is heartbreak for a collector, it can also be a headache for the collector’s heirs. There is no sure way to give up ownership of a dead wallet, so you own it until you die and it becomes part of your estate. And if your estate is large enough, it may be taxed on the value of the NFTs in the wallet, even though they can’t be sold. In any case, your heirs can break the chain by rejecting the wallet.

Of course, this is a typical problem for rich people. The federal estate tax exemption is currently $12.06 million for individuals and $24.12 million for married couples, so most of us have nothing to worry about. But sooner or later, a crypto billionaire will undoubtedly leave behind a dead wallet full of blue chip NFTs, and the tax authorities will come knocking.

What needs to be done? Is there a solution to this completely theoretical but hopefully funny problem? Maybe. But to make it meaningful, you need to understand how the ownership law perceives NFTs.

One is the loneliest number

Legal scholars often describe property as “a bundle of sticks,” a metaphorical way of observing that property consists of a collection of separate rights to use something. Each right is a stick in the bundle, and property owners can use those rights as they wish. Real estate owners can, among other things, take stakes from the rights bundle and license or transfer them.

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But when it comes to NFTs, there’s usually only one big stick: the right to transfer ownership. An NFT is essentially a cryptographic ledger entry that represents something other than an amount of cryptocurrency. General ledger entries can literally represent anything, and NFTs are no exception. But most NFTs represent nominal “ownership” of a digital work of art.

What does that mean? Typically, artists create NFTs and simply declare that they represent ownership of works of art. And NFTs are valuable because the NFT market believes them. But most NFTs don’t give their owners any rights to the artworks they represent. The only thing NFT owners necessarily possess is the right to transfer their NFT to someone else.

Apparently that’s enough to make NFTs valuable. It shouldn’t be a surprise. The only thing proper art collectors have ever cared about is the right to transfer works of art. Everything else is surplus. The only difference is that collectors transfer NFTs on the blockchain, rather than in person. Plus a change.

And yet sometimes the difference matters. It’s all well and good transferring an NFT on the blockchain, until you can’t anymore because it’s in a dead wallet. From a legal perspective, you still own the NFT because you still own the wallet even if you don’t have access to it. But from the perspective of the NFT market, you don’t, because all NFT collectors care about is whether you can transfer your NFT to their wallets.

Of course, ownership law says that you can still transfer ownership of your NFT simply by declaring your intent to do so, regardless of what the blockchain says. Unfortunately, the NFT market doesn’t value these types of transfers, so the law doesn’t matter. Or at least the law won’t help you find a buyer. But it can also help in other ways.

Talking to the tax authorities about art

What about taxes? As Benjamin Franklin once noted, “in this world nothing is certain except death and taxes.” But even their certainty is greatly exaggerated. After all, no one knows when their hour will come, and no one knows what the IRS will charge. At least the IRS offers a facsimile of due process.

See also  Moonbirds Co-Founder Kevin Rose Dumps $1.3 Million NFT Amid New Acquisition

Also see: NFT artist Brian Frye wants you to steal this item

In any case, taxation of NFTs is usually quite predictable. The IRS taxes art as “collectibles,” subject to a 28% capital gains tax, and taxes NFTs just like any other form of art. If you sell an NFT at a profit, you will therefore have to pay 28% tax on the capital gain. Expensive, but simple.

Dead wallet owners are lucky when it comes to taxes. Of course, they can’t sell their NFTs for a profit, which is a big bummer. But if you can’t make a profit, you don’t have to tax anything. Take that, Uncle Sam. But what happens when dead wallet owners die? And what happens when a wallet dies along with its owner?

Posthumous medals

Imagine a wealthy NFT collector dying, leaving behind a wallet full of valuable NFTs. Under inheritance law, the wallet becomes part of the collector’s estate and passes to the collector’s heirs. But what if it’s a dead wallet? The tax authorities don’t care. The NFTs are still part of the estate and are still subject to estate taxes, even though they cannot be sold. It sounds absurd, but we know it’s true because it happened.

In 1959, Robert Rauschenberg created a ‘combine’ or sculptural painting entitled ‘Canyon’. “Canyon” included a stuffed golden eagle that Sari Dienes found in the trash and gave to Rauschenberg. Later that year, Rauschenberg showed the painting at the Leo Castelli Gallery and art dealer Ileana Sonnabend purchased it.

It was a coup for Sonnabend, as “Canyon” is widely considered one of Rauschenberg’s most important works. She exhibited it in the United States and Europe, including at the 1964 Venice Biennale, where Rauschenberg won the top prize for a foreign artist. But her coup ultimately became a catastrophe.

Meet the United States Fish and Wildlife Service, which was notified of “Canyon” in 1981 when Sonnabend returned it to the United States. The Bald and Golden Eagle Protection Act of 1940 prohibits the possession or sale of eagle carcasses, with very limited exceptions. In short: “Canyon” is illegal.

With Raushenberg’s help, Sonnabend obtained a special permit that allowed her to keep the eagle carcass. She still couldn’t sell “Canyon,” so she loaned it to museums, including the Baltimore Museum of Art and the Metropolitan Museum of Art in Manhattan. Problem solved, at least temporarily.

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But when Sonnabend died in 2007, the bird returned. She left an estate worth more than $1 billion to her children Nina Sundell and Antonio Homem, which consisted mainly of works of art, including “Canyon.” The estate sold about $600 million worth of art to pay estate taxes, but it couldn’t sell “Canyon” because of the eagle. Therefore, the work was valued at $0, because a work of art that you cannot sell is worthless.

The tax authorities disagreed. It valued “Canyon” at $65 million and assessed $29.2 million in estate taxes. Unsurprisingly, Sonnabend’s heirs objected, and the IRS ultimately agreed to forgive the bill if the estate donated “Canyon” to charity. So the heirs gave it to the Museum of Modern Art and the problem was solved for good.

Also see: Crypto Tax Basics: A 101 for Beginners

The Sonnabend saga is especially educational because it is so absurd. The outcome was predetermined, the heirs simply did not want to accept it, and the tax authorities were too rigid to explain their expectations.

I assume (or at least hope!) that the IRS will treat dead wallets the same way. An estate cannot sell the NFTs in a dead wallet. But there’s no reason why it can’t transfer ownership of the wallet to charity and thus avoid taxation.

Last year, my CoinDesk Tax Week op-ed focused on donating NFTs to art museums. Among other things, I noted that eligible NFT donors may receive a deduction for charitable contributions, and have been thinking about how donated NFTs might be valued for tax purposes. And in another CoinDesk op-ed, I argued that NFT collectors can donate dead wallets for deductions. After all, they still own the wallet even if they can’t use it.

Frankly, I’m a little skeptical that the IRS will allow NFT collectors to deduct a charitable contribution for donating a dead wallet. It’s too smart to use half, because the asset actually has no real market value, even though theoretically it should. But if the IRS values ​​dead purses at $0 for the charitable contribution deduction, it should also value them at $0 for the estate tax. Here is the hope.

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