Crypto Meets Baseball Cards … the Birth of NFTs

Way back in the 1980s, The Wall Street Journal called baseball cards “nostalgia futures” that were “inflation hedges.” Flash forward to January 2021 and the same Wall Street Journal called Bitcoin a “hedge against inflation.” Now, what if you were to “marry” the cultural nostalgia of baseball cards with the blockchain technology that cryptocurrency runs on? Well, if you did, their offspring would no doubt be non-fungible tokens (NFTs).

Similar to baseball cards, NFTs can be a reproduction of a modern cultural event, art (sometimes original art), video, or music. NFTs are of course, digital as opposed to cardboard. They have been purchased by investors (some would say speculators) as a way of either holding something sentimental to the purchaser or, more often, as a way to invest in something that will (hopefully) appreciate more than alternatives such as stocks, bonds, or traditional art. Some of the largest NFT sales include original digital art sold at Christie’s for $69 million, an NFT version of Twitter’s first tweet by its founder for $2.9 million, a collection by DJ and electronic dance music producer 3LAU for $11.7 million, and a video of a LeBron James dunk for $200,000.

Today, multiple NFT marketplaces have been created to help well-known and aspiring artists and others buy and sell NFTs to fans and collectors. These marketplaces are seeing a drastic increase in volume of transactions ranging reportedly from $4,000 to $300 million over the course of the last couple of months. These platforms can range in complexity, reputation, and use cases, but are all striving for the same goal: to promote NFTs and their versatile uses in the entertainment, arts, and sports industries.

Should you register on one of these marketplaces and go out and buy some? We will explore that later, but first, let’s discuss what you should do if you own or create intellectual property (IP). Don’t walk, but run to explore monetizing your talents or IP in this NFT marketplace. In addition to capitalizing on this red-hot market, some of the advantages include:

1. Unless you negotiate otherwise, you are giving up none of your rights to monetize your IP through traditional means - you are merely selling that digital version.
2. Because of blockchain technology, you can track the NFT through future sales. Sellers often use this mechanism to earn a piece of future sales. This technology also prevents the issuance of a fraudulent duplicate.

Now, of course, there can be pitfalls in putting an NFT together, including negotiating with other rights holders such as music companies. However, given how hot this market is, it is in everyone’s interest to figure this out quickly. 

Let us turn our attention to whether you should buy NFTs as an investment. Before you make your purchase, you should definitely consider: 

1. The speculative nature of this whole marketplace. Many consider NFTs to be a part of a "bubble" and that profit from an investment comes from the assumption (hope) that someone will be there at some point to buy it for an even greater price. Some may call this the "Greater Fool Theory."
2. If you intend to buy an NFT with your appreciated cryptocurrency, keep in mind you will have to pay capital gains tax on the appreciation, (short-term or long-term depending on the holding period) so you may end up paying 20% to over 40% more than you think for the NFT.
3. The blockchain technology involves the running of multiple computers all over the world, and with present technology this leaves a significant carbon footprint. Several environmental activists have recently raised this as an issue. 
4. There are unresolved tax questions for NFT sales. NFTs have blurred the lines between art and collectibles. If an NFT is considered "art", it is taxed at regular capital gains rates, but if the NFT is a "collectible," it would be taxed at a 28% federal rate.

Despite all this, just like baseball cards in the 1980s, NFTs “must” be a good investment. Although certain parts of the baseball card market have recently appreciated along with many other speculative investments, the 1980s and early 1990s indeed turned out to be a bubble with many “investors” losing funds and many cards turning out to be worthless.

In fact, a much younger version of this author invested in thousands of 1989 rookie cards of the supposedly next great Yankee player, Hensley Meulens, to fund my early retirement. Well, I’m still working, and my wife says those cards are great for starting a fire in our backyard barbecue pit! 

Whether you are a potential buyer or seller, Citrin Cooperman’s Entertainment, Music, and Sports, Business Management and Family Office, and Cryptocurrency, Tokens, and Blockchain Practices work seamlessly together to help you sort through the myriad of issues surrounding this subject. Our experienced team can assist through all stages – from obtaining cryptocurrency, to putting your NFT up for sale, to completing a transaction, to tax reporting your (hopefully) massive profit, and beyond. For more information, feel free to contact me at lcohen@citrincooperman.com.