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TECHNOLOGY

as the underlying file to generate an NFT hash How NFTs generate accounting events
value that is linked to the blockchain record. The
file’s hash value becomes part of the NFT.
ACTION ACCOUNTING
NFTs GENERATE REVENUE AND CREATE VALUE
CPAs should be aware that NFTs can be used
to generate taxable revenue and create value (see
Creator sets a royalty MINTING FEE EXPENSE
the graphic “How NFTs Generate Accounting percentage when
Events”). A prime use case for NFTs is allowing submitting the NFT data INTANGIBLE ASSET
to the blockchain network. CREATION
visual artists or musicians to earn royalties each
time their creation is used, say in a game or played
on a streaming service. Currently, artists receive
less than pennies on the dollar for each play or sale
Creator plays a minting
of their work, and nothing for resales. NFTs solve free in cryptoassets to FEE REVENUE
this by providing a cryptographically protected the blockchain network. (ORDINARY)
Network participants
immutable Web3-enabled code that tracks the use
earn income.
of the artistic product and financially rewards the
artist each time their work is used. These rights and SALES REVENUE*
processes are established at the time of “minting,” NFT Marketplace
FEE REVENUE
or creation. The value of this kind of NFT can be
approximated as the value of the future cash flows ROYALTY INCOME
(i.e., the royalties) from the NFT for views and
PURCHASE EXPENSE
plays plus value for the accompanying music, art, or
other content. Creator sells the NFT. Buyer uses or FEE EXPENSE
holds the NFT and later resells it. Creator
Beyond just the buying and selling of NFTs,
receives royalty income. Each transaction
participating in the validation of NFT transactions has an associated fee to add it to the
blockchain. *Tax classi cation of this sales
to add them to a given blockchain also generates revenue will depend on type of
taxable revenues. In order to mint an NFT, the NFT and period of holding.
minter must pay a fee to the blockchain network.
Source: Stacey Ferris, CPA.
The computers/users that mine or validate the
transaction receive the minting fee as a type of
taxable ordinary income. programs that enable the creation of NFTs, their
ongoing operation, and subsequent sales and
HOW TO MINT AN NFT transfers. When the minter is ready to create an
NFTs are created through a process called “mint- NFT, they upload a file to mint and then link
ing” (see the graphic “How to Mint an NFT”). their crypto wallet to the Dapp to pay a process-
The minter first identifies the NFT marketplace ing fee.
where they want to display, sell, or use the NFT.
When making this decision, the minter may con- NFT MARKETPLACES
sider the size of the marketplace, the cryptoasset An NFT’s value is subjectively set when it is listed
accepted in the marketplace, and the marketplace’s for sale by the owner on an NFT marketplace.
fees, among other things. The marketplace may re- These marketplaces are built on the automated
quire the minter to create an account and provide actions of web applications and smart contracts,
state-issued proof of their identity (e.g., driver’s which execute transactions as users initiate them
license, passport, etc.). and meet preset parameters (e.g., transferring
NFT minting platforms are a type of decen- the necessary amount of cryptoassets to pay for
tralized/distributed application (a “Dapp”) that an NFT). Once a buyer deposits the necessary
provides minting capability and a marketplace in amount of cryptoassets with the market’s smart
which to list, buy, and sell NFTs. To an average contract, the market will then transfer the NFT
person, a Dapp would appear to be a website record to the buyer’s wallet. The NFT record is
or a downloadable phone app. Dapps leverage linked to all prior blockchain sales records for it,
smart contracts, which are automated executable which show the buyer, seller, and price paid.

26 | Journal of Accountancy October 2022