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Wrapping NFTs for fun and less tax

I’m sure many of us have heard of, or are familiar with, companies buying and selling property. Instead of some human owning it directly, they might own the property through a firm they set up.

There are many reasons why this structure might be used, but tax is certainly one of these reasons.

I’ve previously mentioned SuperRare from a digital art perspective, and we’re seeing an explosion in activity on the platform. It’s an interesting concept, again proving that blockchain enables digital scarcity.

While initially this scarcity was due to the limited supply of blockchain native coins or fungible tokens, through the ledgers ability to track ownership of these. Now, we’re seeing this scarcity in the form of non-fungible tokens and NFT smart contracts.

What makes SuperRare very interesting for an artist is the commission SuperRare charges on each secondary market resale of the artwork, as this commission is passed on to the artist. Because SuperRare’s NFT contract is programmed to allow for this, it opens the door to future cashflow on each and every artwork made and sold by said artist.

This “tax” on resale is naturally not possible with traditional art markets. There’s no central exchange to keep track of it.

Hence, we might start seeing fungible or non-fungible contracts wrapping NFTs, as a workaround to avoid such commissions. Because instead of having a human directly owning an artwork through SuperRare, this ownership can be placed into a separate contract. That contract might itself represent either a fungible token, allowing partial ownership of the artwork NFT, or itself be a NFT wrapper. In either case, ownership can now be transferred without paying SuperRare, and the artist, any further commissions.

Can SuperRare prohibit this? Sure, maybe, if they have a reliable mechanism to detect that the owner of a NFT is another contract. But it’s not clear how future proof or overall beneficial that would be.

And of course, should the NFT art market really explode, traditional trusts might also be used to wrap NFT ownership, making it impossible to detect on-chain anyway. And to complete the setup, you’d tokenize the off-chain ownership on-chain again..