The market for non-fungible tokens, or NFTs, is one that’s poised to grow in the next several years as more developers begin integrating them into their applications. The rise of NFTs can be attributed to the rise of cryptocurrency. As more people get involved in cryptocurrency, they begin to buy and hold non-fungible tokens on an exchange.
What are NFTs?
Non-fungible tokens are digital assets whose exchange between the creator and the buyer, via the financial transaction of a cryptocurrency such as Ethereum, is logged for anyone to view.
An NFT is a unique digital identifier—a piece of information generated and maintained by a decentralized network of computers across the Internet. At a high level, an NFT is a type of digital token on a blockchain that represents ownership of an asset and can be transferred between users. These distributed tokens can represent anything from virtual property to unique items like collectibles (Cryptokitties).
NFTs are unique and cannot be replicated. They are the future of collectibles. The technology behind NFTs is based on blockchain and runs on cryptography. With the aid of blockchain technology, collectibles can be registered, encrypted, and sent across any network in seconds.
The main difference between non-fungible tokens and other cryptocurrencies is that they can’t be replaced or exchanged with one another and they are not mutually interchangeable. No two NFTs are alike. Each comes with a “fingerprint,” which acts as a unique identifier throughout the crypto space.
How Do NFTs Work?
Each NFT represents something unique on the Ethereum blockchain. The blockchain does not only keep track of the current owner of an NFT, but it also keeps records of all previous ownership transactions. Because of Ethereum’s decentralized blockchain technology, these records can’t be changed or altered retroactively. When you own, transfer, or sell an NFT, the transfer is permanent and irrefutable.
The NFT creator (rights holder) retains all copyright over the creative work. They approve or deny the transfer of rights and are free to request additional transaction fees from any subsequent transactions, they can also deny any sale for any reason. The NFT is delivered directly to the consumer in perpetuity.
With NFTs, the creator can create multiple copies of the original. Each one is considered a unique NFT and will have different attributes, just like physical collectibles. The replicas will not be as valuable as the original and the law of supply and demand will come into play.
In NFTs, the creator retains ownership of their work even after it is sold, so they can continue to receive income from it. These NFTs are technically licenses that represent shares in a physical or digital asset, which makes them more like stocks than works of art. And with the blockchain doing the accounting, owners can trade assets peer-to-peer without experts or intermediaries, and creators will get paid directly for each transaction their creations make.
Are NFTs Taxable?
NFTs are seen as collectibles by the IRS and thus treated similarly to art collections, precious metal coins, stamps, or other items deemed to have aesthetic or historic value. NFTs are subject to capital gains tax in the U.S. and many other jurisdictions. If you sell an NFT at a gain, that gain is considered to be long-term capital gain and is taxable at a rate of 28%.
What Are NFTs Worth?
All NFTs derive their value from the underlying assets that they represent. It is crucial to understand that all NFTs have no intrinsic value on their own, but rather are only worth what an individual user is willing to pay for them.
The true value of NFTs is still to be realized. With rarity and authenticity guaranteed, NFTs will change the world of collectibles as we know it. As the NFT economy continues to grow, you will see an increasing number of collectors and speculators looking for opportunities to get in on the action. While there’s no telling what will become the next “Rare Pepe,” there’s no denying that as the history of NFTs plays out, so too will its valuations.
To date, the most expensive NFT was sold by digital artist Beeple. The digital asset, known as “Everydays: the First 5000 Days,” was sold for a whopping $69.3 million. This is the first piece of purely NFT artwork to be offered by a major auction house (Christie’s).
Is Investing in NFTs Worth It?
NFTs are a relatively new investment, and as such, there’s still a lot to learn about them. As technology develops, we can only imagine what they’ll be able to do in the future. In addition, NFT is incredibly young and comes with its own risks; one of which being that digital art could eventually be worth nothing. However, it’s important to note that NFTs can’t replace physical art. Instead, they add an entirely new layer of collectibility for fan-owned characters and worlds.
If you really want to invest in NFTs, but aren’t sure about it yet, set a spending limit. This way, whatever money you do invest won’t be completely gone if the market goes down. Also, remember that NFTs are highly speculative, so don’t go into it with the expectation of getting rich. It’s also important that you realize that not only is it highly speculative, but there’s no guarantee that even if you do get in at this point in time that it will go up or stay stable. Only invest what you can afford to lose
Disclaimer: The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.