California does not have a single “NFT law,” but non-fungible tokens are covered by a mix of existing rules: intellectual property, securities, consumer protection, tax, privacy, anti-money laundering and California’s Digital Financial Assets Law. A business that creates, sells or hosts NFTs should decide early what rights the buyer receives, whether the token could be treated as a security, and whether its activities require a license.
The NFT market has cooled since its peak, but NFTs are still used for digital art, ticketing, loyalty programs, gaming items and brand experiences. Here are the main legal issues California businesses should consider.
What Is an NFT?
An NFT is a unique token recorded on a blockchain. Unlike Bitcoin or other fungible cryptocurrencies, each NFT is distinct. An NFT usually contains or points to metadata, such as a link to an image, audio file or video, and records who controls the token. The token is not the artwork itself; the underlying file often lives on a separate server or decentralized storage network. That distinction drives many of the legal questions below.
Intellectual Property: What Does the Buyer Actually Get?
Buying an NFT generally does not transfer copyright in the underlying work. Under the Copyright Act, a transfer of copyright ownership requires a signed writing. Unless the project’s terms say otherwise, the creator keeps the copyright and the buyer gets ownership of the token plus whatever license the creator grants.
Projects use very different license models, ranging from personal display only, to limited commercial use, to broad commercial rights or public-domain dedication. Businesses should:
- Publish clear, accessible license terms that travel with the NFT, rather than relying on code alone.
- Confirm they own or have licensed every element of the work, including music, fonts, photographs and characters.
- Avoid using other companies’ trademarks or celebrities’ names and likenesses without permission. Courts have found NFTs that used a famous brand name to be infringing, and California protects the right of publicity.
- Register important brands; see our guide to trademarks.
Securities Law Risk
Whether an NFT is a security depends on its economic reality, not its label. Under the federal Howey test, an investment contract exists when people invest money in a common enterprise with an expectation of profits from the efforts of others. California applies a similar analysis under its own securities law.
Factors that increase risk include selling large collections marketed as investments, promising price appreciation or “roadmaps” that depend on the issuer’s continuing efforts, offering a share of revenue or royalties, and fractionalizing an NFT into many interests. The SEC has brought enforcement actions over NFT offerings in the past, and while federal crypto enforcement priorities have shifted since 2025, the underlying law has not been repealed and private plaintiffs and state regulators can still bring claims. Market NFTs as collectibles or utility, avoid profit promises, and get advice before adding revenue-sharing features. If your project will raise money, see our post on raising capital without registering with the SEC.
California’s Digital Financial Assets Law
California’s Digital Financial Assets Law (DFAL) requires certain businesses engaged in digital asset business activity with California residents, such as exchanging, transferring or storing digital assets for others, to obtain a license from the Department of Financial Protection and Innovation (DFPI), unless an exemption applies. Its licensing requirements took effect in 2026 after the original compliance date was postponed.
Whether an NFT business is covered depends on what it does. A creator minting and selling its own NFTs is in a different position than a marketplace that holds customers’ tokens or processes payments in crypto. The statute’s definitions and exemptions are technical, so NFT platforms and custodial wallets should review them carefully.
Consumer Protection
California’s Unfair Competition Law and False Advertising Law apply to NFT marketing. Avoid misleading claims about scarcity, future utility, celebrity involvement or investment value. Other areas to watch:
- Randomized drops and “mystery boxes” can raise gambling or sweepstakes concerns, depending on how they are structured.
- Utility promises such as event access or merchandise should be clearly described, including what happens if the business can no longer provide them.
- Terms of service should cover refunds, platform changes, dispute resolution and the risks of blockchain transactions. See our post on legal aspects of e-commerce in California.
Tax Considerations
The IRS treats digital assets, including NFTs, as property. A creator selling NFTs generally has ordinary business income, while an investor who sells an NFT may have capital gain or loss. The IRS has indicated that some NFTs may be treated as “collectibles,” which are taxed at a higher maximum long-term capital gains rate. New broker reporting rules for digital asset transactions are also being phased in. California has no lower capital gains rate, so gains are taxed as ordinary income at the state level. Sales and use tax treatment of NFTs, particularly those bundled with physical goods, should be reviewed with a tax advisor.
Privacy and Anti-Money Laundering
Public blockchains are not private. Transactions are visible to anyone, and wallet addresses can often be linked to real people. If your business collects personal information from buyers, such as email addresses, wallet addresses tied to accounts, or know-your-customer data, the California Consumer Privacy Act may apply if you meet its thresholds. Our post on California’s privacy laws explains the basics.
NFT marketplaces can be used for money laundering, and federal authorities have flagged this risk. Platforms should screen against U.S. sanctions lists and consider whether federal Bank Secrecy Act obligations apply to their business model.
Smart Contract Risk
Smart contracts execute automatically, and bugs can be costly and hard to reverse. Have code audited, keep administrative keys secure, and make sure the written terms of sale control if the code and the terms conflict. Creator royalties written into smart contracts are not always honored by marketplaces, so do not count on them unless a marketplace agreement requires them.
The Takeaway
NFTs are regulated through existing law, and California has added a digital asset licensing regime that may apply to some NFT businesses. Clear license terms, careful marketing, attention to securities and licensing questions, and solid tax planning help California businesses use NFTs without avoidable legal surprises.
Frequently Asked Questions
Does buying an NFT give me the copyright in the artwork?
Usually not. An NFT is a token that points to or is associated with a work, and copyright stays with the creator unless there is a written transfer. What the buyer can do with the work depends on the license terms the project provides.
Can an NFT be a security?
Yes, depending on how it is offered. An NFT sold mainly as an investment, with promises of returns from the issuer’s efforts, may be an investment contract under federal and California law. NFTs sold as collectibles or for genuine use are less likely to be securities, but there is no blanket exemption.
Do California businesses need a license to sell NFTs?
Many creators selling their own NFTs will not need a money transmission or digital asset license, but businesses that hold, exchange or transfer digital assets for customers may. California’s Digital Financial Assets Law requires licensing for certain digital asset business activity, so marketplaces and custodial platforms should review it with counsel.
How are NFT sales taxed?
For federal income tax purposes, the IRS treats digital assets, including NFTs, as property, so sales can produce capital gain or ordinary income depending on the seller. Some NFTs may be treated as collectibles with a higher long-term capital gains rate. California taxes capital gains as ordinary income, so work with a tax advisor.
How Sutter Law Can Help
We advise businesses on licensing terms, marketing, securities questions and contracts for digital products. Learn more about our intellectual property practice, or contact us for a free consultation.
This article is general information, not legal advice. Reading it does not create an attorney-client relationship.
