Brief commentary on recent cases, rulings, notices, and related federal tax guidance.
Red Flags in the NFT Market
While there are many legitimate uses for cryptocurrencies and digital assets, criminals look for ways to exploit new technologies. A global tax group released a bulletin with some red flags that individuals should be aware of when dealing with NFTs. Awareness of these red flags may save investors from costly mistakes and provide advisors with tools to protect their clients.
At a recent conference held in Washington, D.C., a member of the Joint Chiefs of Global Tax Enforcement, a group consisting of agencies from Australia, Canada, the Netherlands, the UK, and the US (“J5”), briefly mentioned the group’s investigation into a globally coordinated non-fungible token (NFT) fraud scheme worth at least $1 billion. This announcement comes less than a month after the J5 released a bulletin warning about risks associated with NFTs. The release, known as the J5 NFT Marketplace Red Flag Indicators, lists some indicators that individuals should be aware of when dealing with or purchasing NFTs.
While the vast majority of individuals purchasing or selling NFTs are doing so for legitimate reasons, the relative anonymity afforded by many decentralized finance networks and blockchain-enabled platforms allow criminals to exploit these new technologies. Any one of following the red flags alone is not conclusive of criminal activity, but purchasers of NFTs and other digital assets should weigh the risks associated with any of these behaviors and perform appropriate due diligence before making any purchase. The red flags can roughly be categorized as indications of either money laundering or fraud, which can carry criminal penalties and result in the complete loss of the investment.
Some indicia of money laundering include:
Other red flags are more indicative of fraud. These indicia include:
Overall, individuals getting involved in the NFT market or considering the purchase of an NFT should be aware of these red flags as it could mean the difference between investing in a legitimate project and losing your money to scammers.
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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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