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TECHNOLOGY

What CPAs need to

know about NFTs

NFTs are unique, immutable, and auditable records of the
ownership of both physical and digital assets.

By Stacey Ferris, CPA, and Peter Rehm, CPA (retired)

ven though bitcoin was introduced to the correctly record and report NFTs and other digital
world over a decade ago and nonfungible assets. Enterprising CPAs have teamed up with
Etokens (NFTs) have been in development since developers to bring crypto modules to market that
2014, argument persists over the underlying value can hook up to an existing accounting system.
of digital assets, including NFTs. Many accountants This article explores what CPAs need to know
express skepticism over digital assets. Yet, despite about NFTs today and why there is so much hype
the doubt, digital assets are foundational to the around them. What problems do they solve? What
evolving Web3 vision of the internet, e-commerce, differentiates an NFT from other digital assets
and peer-to-peer transactions. By 2030, many and gives it value? How are they created? And for
companies, public and private, as well as individuals, accounting purposes, what are the types of NFTs?
will likely have accounting and financial reporting
challenges related to digital assets. A NEW PHASE IN THE HISTORY OF THE
NFTs are a method of demonstrating ownership INTERNET
of physical, intangible, and digital assets. They have A little history is valuable at this point. The terms
far more uses than buying and selling pixelated Web1, Web2, and Web3 are used to describe dis-
JPEGs. For instance, visual artists and musicians tinct stages in the evolution of the internet. Web1
can use them to sell works directly to fans. Venues was the first iteration of the internet developed for
are selling NFT tickets to events as a way to reduce private military and institutional use starting in the
scalping and give more revenue to artists. Real 1970s. It provided users with the ability to share
estate professionals are exploring using NFT deeds information and little more. Web2 emerged in the
and contracts to streamline the process of buying late 1990s and is the iteration of the internet that
and selling property. CPAs who work in these areas is allowing you to read this article. It is character-
may soon face questions from clients about NFTs. ized by ease of use and high interactivity, as well
NFT records kept on blockchains are crucial to as widespread application of encryption to provide
auditors evaluating assertions around the existence security for internet-based activities.
and valuation of digital assets and the rights and A fundamental problem with Web2 is that it can
obligations held by those who own them. Many be very difficult to prove the authenticity or owner-
startups and other “digital native” companies are ship of data on the internet. Data is easy to steal
already seeking accountants, tax specialists, auditors, and easy to duplicate. Images, videos, and audio are
regulatory personnel, and CFOs who can help them easy to “deep fake” and manipulate.

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