The Dark Side of NFT

The Dark Side of NFT

How NFTs are used for potentially sinister means.

NFTs, digital collectibles with transferable ownership, have been steadily gaining popularity and value this year. Yet, locked on the blockchain network, NFT trades are oftentimes untraceable. In the third quarter of 2021, sales volume had surged to US$10.7 billion, up more than eightfold from the previous quarter, according to market tracker DappRader

But there is a dark side to NFTs that often goes under the radar.

Tax evasion

Each year, the U.S. fails to collect as much as US$1 trillion in taxes owed each year. The figure  has since increased with the explosion of cryptocurrencies, which are difficult for the Internal Revenue Service (IRS) to track and tax. 

This is because NFTs exist only in the crypto world, and are “not visible items by design” in the real world, according to IRS Commissioner Charles Rettig. 

Many crypto holders have taken advantage of the invisibility of NFTs to avoid paying taxes. In the US., cryptocurrencies are taxed by the IRS as capital assets, not currencies. As such, crypto owners are required to pay capital gains taxes if they sell their crypto for profit or use it for a purchase. Those who are discovered to have attempted to hide their crypto earnings could potentially be in trouble with the IRS. 

U.S. Republican lawmaker Rob Portman is currently working on a bill to address the problem of the lack of reporting and disclosure around crypto transactions. Rettig agreed that enforcing appropriate reporting rules for the crypto world would be important in helping close the tax gap.

Dark web auctions

The Tor Project, a nonprofit organization that creates and deploys free and open source anonymity and privacy technologies for users who wish to keep their Internet activities private from websites and advertisers, sold an NFT artwork for US$2 million in May 2021.

The artwork, created by Itzel Yard, is a piece of generative art of a private cryptographic key used to create the first Tor onion service. The artwork shows the code for https://duskgytldkxiuqc6.onion/ or “Dusk” which is often used as an example of a “.onion” domain in Tor documentation. Websites with “.onion” domains are what is commonly known as the dark web.

The artwork was bought by PleasrDAO, a decentralized autonomous organization that “collects digital art that represents and funds important ideas, movements and causes.” One anonymous member of PleasrDAO said they bought the piece because it “marries so many of the things that are important to [them]: artwork, privacy and the cypherpunk (those who advocate for the use of cryptography as a route to social and political change) ethos.”

The untrackable nature of NFT transactions makes it easy for users to abuse loopholes for their own gain. Many have said that regulations might be necessary to ensure that NFTs are used in a proper manner. However, how regulations are imposed ought to be a matter of discussion as well, in order to make sure that the spirit of cryptocurrency—decentralization and freedom of exchange—will not be suffocated.

Header image courtesy of Unsplash

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