SUMMARY NFTs exploded in 2021 with collections selling for millions, but crashed dramatically in 2022 as values plummeted 95% and trading volume fell 97%. The collapse exposed pump-and-dump schemes, undisclosed celebrity endorsements and unregistered securities offerings. Investors who suffered losses may have legal remedies through securities violations, fraud claims or class actions, though recovery faces challenges. The SEC has begun enforcement actions, and losses may offer tax deductions.
If you’re reading this post, you’ve heard about NFTs, or non-fungible tokens. Perhaps you even invested in them. Maybe you bought digital artwork, a profile picture for social media or a token promising access to exclusive communities and future benefits. Now, as the dust settles on what many are calling one of the most dramatic speculative bubbles in recent memory, it’s worth examining what happened, what legal protections (or lack thereof) existed for investors and what options may be available to those who suffered losses.
NFTs burst into mainstream consciousness in 2021. Digital artwork sold for millions at major auction houses, celebrities from sports stars to musicians promoted their collections and major brands from fashion houses to fast-food chains rushed to launch their own NFT projects. The promise was enticing: true digital ownership, scarcity in the digital realm and potentially massive returns on investment. Proponents argued that NFTs would revolutionize everything from art collection to real estate to gaming.
Collections like Bored Ape Yacht Club became status symbols among the wealthy and tech-savvy, with individual tokens selling for hundreds of thousands or sometimes millions of dollars. The secondary market thrived as traders flipped NFTs for profit. Social media was awash with stories of ordinary people making extraordinary returns. Virtual land in metaverse platforms sold for eye-watering sums. The market seemed unstoppable, and the fear of missing out drove even more investors to jump in, often without fully understanding what they were buying.
The hype reached such heights that traditional auction houses like Christie’s and Sotheby’s began hosting NFT sales. Major corporations announced partnerships with NFT platforms. Venture capital poured billions into NFT-related startups. Financial advisors who had never mentioned cryptocurrency before were suddenly fielding questions from clients about whether they should allocate portfolio funds to NFTs. The technology seemed poised to transform digital commerce and ownership.
Then came the crash. As the broader cryptocurrency market collapsed in 2022, NFT values plummeted alongside it. Many collections that had traded for significant sums saw their values drop by 95% or more. Some fell even further. Trading volume evaporated as buyers disappeared from the market. NFT trading volumes fell 97% from January 2022’s peak of $17 billion to just $466 million by September 2022. What had seemed like valuable digital assets became, in many cases, functionally worthless digital files that few wanted to purchase at any price.
The collapse exposed several troubling patterns and raised serious legal questions. Many NFT projects made promises they couldn’t or wouldn’t keep. Creators promised exclusive benefits, access to future projects, physical merchandise, intellectual property rights or ongoing community development. Roadmaps went unfulfilled, utility never materialized and some creators simply disappeared with investors’ money. In some cases, project servers went silent overnight, websites disappeared and the anonymous creators were never heard from again.
Some projects were artificially inflated through coordinated buying, social media hype and celebrity endorsements, only to crash once early investors and insiders sold their positions. These pump and dump schemes are illegal in traditional securities markets, but operated with impunity in the largely unregulated NFT space. Influencers promoted projects without disclosing their financial interests. Celebrities endorsed collections and then quietly sold their holdings before the inevitable crash. Wash trading, where the same parties trade assets back and forth to create the illusion of demand and inflate prices, was rampant.
The NFT market operated largely without regulatory guardrails, leaving investors vulnerable to practices that would be illegal in traditional securities markets. There were no prospectuses, no financial disclosures, no independent audits and often no clear information about who was actually behind a project. The anonymity afforded by blockchain technology, while appealing to some, meant that bad actors could operate with little fear of accountability. Know Your Customer rules that apply to traditional financial institutions were largely absent. Anti-money laundering protections were minimal or nonexistent.
The speculative frenzy has ended. While NFTs haven’t disappeared entirely, the market is a shadow of its former self. Most collections have negligible value and trading volume remains minimal compared to peak levels. Some legitimate uses continue quietly in corners like digital art collecting, gaming items and event ticketing, but the cultural phenomenon and massive speculation around profile picture collections has definitively crashed.
Legal Considerations for Investors
If you invested in NFTs and suffered losses, you may be wondering about your legal options. The landscape is complex, evolving and fact-specific, but there are several avenues worth understanding.
The Securities and Exchange Commission has indicated that many NFTs may qualify as securities, which would subject them to federal securities laws. The determination depends on the Howey Test, a framework established by the Supreme Court that examines whether an investment involves money invested in a common enterprise with an expectation of profits derived from the efforts of others. If your NFT was sold as an investment opportunity with promises of returns, appreciation or benefits that would come from the project team’s ongoing efforts, it likely falls under securities regulations. If that’s the case, the sellers may have violated securities laws by not registering the offering or qualifying for an exemption.
The SEC brought its first NFT enforcement action in August 2023 against Impact Theory, finding that the company’s NFTs constituted unregistered securities. Impact Theory agreed to pay more than $6.1 million and destroy all remaining NFTs in its possession. The SEC has since brought additional enforcement actions against NFT projects including Stoner Cats 2 and Flyfish Club.
Unregistered securities offerings can give rise to rescission rights, allowing investors to essentially unwind their purchase and recover their investment. The challenge, of course, is identifying the sellers, establishing jurisdiction and actually collecting on any judgment. But the legal theory is sound.
If you were defrauded through false statements, undisclosed conflicts of interest or misrepresentation of the project’s nature or prospects, you may have grounds for legal action under both federal and state fraud statutes. Fraud requires proof that false statements were made, that they were material to your investment decision, that you reasonably relied on them and that you suffered damages as a result. In the NFT context, this might include false promises about utility, misleading statements about the team’s credentials, undisclosed insider selling or fake volume and price manipulation.
Wire fraud statutes may apply if fraudulent communications crossed state lines, which in internet-based schemes they almost certainly did. State consumer protection laws may provide additional remedies, particularly in jurisdictions with strong consumer protection statutes that allow for damages, attorney’s fees and sometimes punitive awards. Some states have laws specifically targeting deceptive trade practices that could apply to NFT promotions and sales.
Some NFT projects have already faced class action lawsuits. High-profile collections and celebrity-backed projects have been sued for securities violations, fraud and deceptive marketing. In December 2022, a class action lawsuit was filed against Yuga Labs (creator of Bored Ape Yacht Club) and numerous celebrity endorsers including Justin Bieber, Madonna, Jimmy Fallon, Paris Hilton, Gwyneth Paltrow and others, alleging they conspired to artificially inflate NFT prices through undisclosed paid endorsements. The lawsuit was ultimately dismissed in October 2024 when a federal judge found the plaintiffs failed to prove the NFTs were securities under the Howey Test. If you invested in a project where fraud or securities violations occurred, you may be able to join existing litigation or explore new claims. Class actions can be advantageous because they pool resources, spread litigation costs across many plaintiffs and can be more economically viable than individual suits when individual damages are substantial but not enormous.
However, pursuing legal action can be difficult, and it’s important to understand the challenges. Many NFT creators operated pseudonymously or under aliases, making them hard to identify and locate. Projects were often structured offshore in jurisdictions with weak enforcement and limited cooperation with U.S. authorities. The decentralized nature of blockchain technology creates jurisdictional complications, as transactions may touch multiple countries and determining where a “sale” occurred for legal purposes can be murky.
Even successful claims may be difficult to collect on if creators have disappeared, spent the funds or moved assets beyond the reach of U.S. courts. Cryptocurrency’s mobility makes it relatively easy to transfer assets across borders and hide them in ways that traditional bank accounts cannot be hidden. That said, blockchain’s transparency can work in plaintiffs’ favor, as transaction histories are public and traceable, which can help establish the flow of funds and identify misconduct.
There are also questions about the adequacy of terms of service and disclaimers that many NFT projects included. Some projects had purchasers agree to terms that disclaimed any investment expectations, limited liability or required arbitration. Courts will ultimately decide how enforceable these terms are, particularly when they conflict with securities laws or are used to facilitate fraud, but they do add another layer of complexity to potential litigation.
Losses from NFT investments may also have tax implications that you should understand and potentially take advantage of. The IRS treats NFTs as property, similar to cryptocurrency. If you sold your NFTs at a loss, those losses may be deductible as capital losses, which can offset capital gains from other investments and up to $3,000 of ordinary income per year, with excess losses carried forward to future years. If your NFT became worthless but you haven’t sold it, the tax treatment is less clear, though there may be ways to establish a worthless asset deduction.
The IRS announced in March 2023 that certain NFTs may be treated as collectibles subject to a 28% long-term capital gains tax rate, higher than the typical 20% maximum rate for other capital assets. The IRS uses a “look-through analysis” to determine whether an NFT represents an underlying collectible asset.
It’s important to properly document your losses with records of purchase prices, dates, wallet addresses and sale prices or evidence of worthlessness. Given the complexity and the evolving IRS guidance on cryptocurrency and NFT taxation, you should consult with a tax professional who understands digital assets. The tax benefits won’t make you whole, but they can help offset some of the financial pain.
Moving Forward
The NFT bubble serves as a reminder that emerging technologies and new investment vehicles often attract both innovation and exploitation. When regulatory frameworks lag behind market developments, investors bear increased risk. The absence of regulation creates opportunities for bad actors, and the complexity of new technologies makes it easier to confuse or mislead less sophisticated investors. History is full of similar episodes, from railroad stocks in the 1800s to internet companies in the late 1990s to subprime mortgage securities in the 2000s.
If you invested in NFTs and believe you were defrauded or that your investment involved unregistered securities, consult with an attorney who understands both securities law and blockchain technology. While recovery may be challenging given the obstacles discussed above, in some cases legal remedies may be available. Even if you’re not sure whether you have a claim, a consultation can help you understand your options and whether pursuing action makes sense given your specific circumstances and losses.
Beyond individual legal remedies, the NFT collapse may lead to regulatory action (perhaps under a different administration). The SEC has already brought some enforcement cases and has signaled that it views many NFTs as securities subject to its jurisdiction. Congress may eventually provide clearer statutory authority and guidance. State regulators are also paying attention. This regulatory attention, while it comes too late for many investors, may provide additional avenues for recovery through enforcement actions that result in restitution or disgorgement funds.
The key lesson? Whether it’s NFTs or the next new investment opportunity that promises revolutionary returns, approach with caution, do thorough due diligence, understand what you’re actually purchasing and be skeptical of promises that seem too good to be true. Ask basic questions that any legitimate investment should be able to answer: Who is behind this? What exactly am I buying? Where is the value supposed to come from? What are the risks? Is this registered with regulators? Who is promoting this and what is their financial interest?
If the answers are vague, if the promoters are anonymous, if the emphasis is on getting in early before prices rise or if there’s pressure to invest quickly before you miss out, those are red flags. Legitimate investments can explain themselves clearly, don’t rely on artificial scarcity or fear of missing out and give investors time to make informed decisions. The fact that something uses blockchain technology or is being discussed excitedly on social media doesn’t make it a good investment or protect you from fraud.
For those who did invest and suffer losses, document everything you can: transaction records, promotional materials you relied on, communications with project creators, screenshots of promises or roadmaps and evidence of what actually happened versus what was promised. This documentation will be essential whether you’re considering legal action, making an insurance claim or simply claiming a tax deduction. The more you can show about what you were told, what you reasonably expected and how reality diverged from those expectations, the stronger any potential claim becomes.
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