written on behalf of Feigenbaum Law
We have previously discussed cryptocurrency and non-fungible tokens (“NFTs”) and how they have opened new streams of revenue for athletes. We have also reviewed their tax implications. This article discusses how the world’s ongoing economic issues have impacted the world of cryptocurrency (“crypto”) and NFTs.
It’s no secret that the economies of the United States and Canada have taken hits in the past few years, with some speculating that a recession is imminent. Crypto has not been immune from these dips.
Bitcoin, the most well-known cryptocurrency, was enjoying extremely high prices at the end of 2021, with its peak coming in at just over $67,000 USD in early November. That’s far from Bitcoin’s current price, which Yahoo reported last week was below the $20,000 mark. The crypto news site Coindesk reported on August 31 that Bitcoin and other popular cryptocurrencies, such as Ethereum and Solana, were experiencing similar vulnerability as what is being experienced by mainstream markets. CNBC reported in late August that Bitcoin’s slump coincides with a significant selloff of US stocks. Some proponents of Bitcoin may have hoped that the decentralization of the currency would allow it to avoid the market downturns experienced by the rest of the economy, but that doesn’t seem to be the case.
At the same time, another cryptocurrency that had hoped to build a bridge between crypto and traditional finance, TerraUSD, lost nearly all its value in May. TerraUSD’s main selling point was that it was designed to be aligned with the U.S. Dollar, meaning one of its coins would always be worth $1 USD. That plan did not live up to its hype when it crashed to just pennies in May. The company behind the currency had purchased more than 80,000 Bitcoin for backing up the currency in an event like economic downtown, but by mid-may had reportedly used up all of it.
Theft of any digital asset has been a story for as long as the Internet has been around (for example, the Napster controversy of the early 2000s). Just this past February, two people were arrested in the United States for allegedly conspiring to launder $4.5 billion in stolen crypto following the 2016 hack of a virtual currency exchange. Over $3.6 billion was seized by law enforcement. In some cases, people have lost bitcoin not because of theft but because of people losing access to their accounts. In fact, one report stated that more than $100 billion in Bitcoin is estimated to have been lost because people lost access to accounts through a physical hard drive or the passwords needed to access accounts.
The non-fungible token (“NFT”) world is closely tied to crypto, with many NFT markets accepting crypto as payment. For those who need to be caught up, an NFT is a unique digital file traded on the blockchain, such as an image or a song. Popular brands of NFTs include Bored Ape and Vee Friends.
Much like the crypto market, NFTs have been making headlines due to some of the trouble associated with them. The UK’s Guardian newspaper reported more than $100 million worth of NFTs were stolen between July 2021 and July 2022, with scammed amounts averaging at about $300,000.
Hackers can use several methods to trick people into allowing them to access and change ownership of their NFTs. Many scams involve tricking people into accidentally handing over their login information to access their NFTs, enabling hackers to make an irreversible change in NFT ownership. This can be done through simple email phishing tricks or elaborate methods such as creating a website that looks like a legitimate NFT site. Users then log into the fraudulent site, allowing hackers to record their login information for use on the actual site.
One of the more high-profile examples of NFT theft occurred this summer and involved actor Seth Green, well-known for his role as Dr. Evil’s son in the Austin Powers movie series. At the end of May, Green went on Twitter to announce that his Bored Ape NFTs were stolen after someone gained access to his crypto wallet (an online account where cryptocurrencies or NFTs can be stored, much like photos in an online photo app). Green stated that he was planning to use the stolen NFTs to create a new television series, but the theft put those plans on hold since he didn’t necessarily own the rights to the images any longer.
A few weeks later, Green announced that his “kidnapped” Bored Ape had been returned to him, albeit at a cost. Buzzfeed reported that Green paid $297,000 to recover his NFT, which is $100,000 more than he initially paid, meaning he essentially had to buy the asset twice. There is no news on whether or not Green’s other stolen NFTs have made it back to him. However, in June, Buzzfeed stated that transfers of his other Bored Ape were frozen due to suspicious activity, meaning that whoever possessed it would be unable to sell or transfer it to another user.
Feigenbaum Consulting helps clients navigate jurisdictional laws and regulations to lower their overall tax risk and yield sizeable tax benefits, including those related to cryptocurrency and NFTs. We offer services to clients in the U.S., Canada, and around the world. To schedule a confidential consultation, call us at 905-695-1269 (or toll-free at 877-275-4792) or reach out online.