Updated: Feb 8, 2022
NFTs aka Unique Digital Assets
The Mona Lisa is one of the most valuable paintings in the world. Poor Mona Lisa. Historically a victim of theft and duplication. Non-Fungible Tokens could protect copyrights for digital prints of the Isleworth Mona Lisa, Prado Mona Lisa, and the original Mona Lisa. Non-Fungible Tokens (NFTs) would eliminate unauthorized digital copies. NFTs will prevent the chaos that has occurred with the original Mona Lisa and other valuable paintings.
Two questions may come to mind.
1. What in the world are Non-Fungible Tokens?
2. Are they Cryptocurrency?
Well…let’s answer the second question first. Short answer No.
Cryptocurrency is a ‘fungible’ asset.
Bitcoin: Each Bitcoin is worth exactly the same amount.
Other examples of fungible assets include:
Currency: Currencies can be cross-exchanged for one another at an agreed-upon market rate. United States Dollars can be exchanged for Euros, Japanese Yen, or Bitcoin in whole and fractional numbers.
Stocks and Mutual Funds: When investing in stocks and mutual funds, investors spend cash to get a financial instrument of the same value at the time of purchase. If a single share of stock cost $5.70, the buyer knows how much they need to spend to gain multiple shares, knowing it can be exchanged for cash in the future.
Precious metals: Gold and silver are traded daily at a market rate, assuring owners how much value they hold when it's time to buy. When it's time to sell, someone holding a precious metal can easily exchange it for cash based on the market rate, making it fungible.
So What Are Non-Fungible Tokens?
Non-Fungible Tokens commonly called NFTs. are a special kind of ‘crypto asset’ in which each token is unique. Because every NFT is unique, it can be used to authenticate ownership of digital assets like precious artworks and recordings
Why Would An Artist, Musician, Scientist Create an NFT?
Traditionally in the art world, once a physical piece is sold, the artist no longer receives revenue from its future sales. However, when you sell a digital file through an NFT, you continue to make money long after that first transaction. As the original creator of the digital asset, you get a cut from every future sale of that NFT.
How Does NFTs work
This question leads us to a folk. If you’re familiar with blockchain technology, you would know that what I just said is a bit of a joke. Nevertheless, we can give you a very technical explanation or we can take the high road and give you working knowledge. I will choose the latter.
NFTs are certificates of authenticity for digital artifacts. Each NFT is stored on an open blockchain e.g., Ethereum and anyone interested can track them as they’re created, sold, and resold. Most non-fungible tokens are built using the ERC-721 and ERC-1155 standards, which allow creators to issue unique crypto assets via smart contracts. Because each NFT is stored on a blockchain, there is an immutable record starting with the token’s creation and including every sale. Because they use smart contract technology, NFTs can be set up so that the original artist continues to earn a percentage of all subsequent sales.
Examples In Action:
NBA Moments: The first NFT was offered in late-2017 by NBA Top Shot. Fans can collect ‘Moments’ which are tradable non-fungible tokens (NFTs) that contain a video clip of a specific game highlight as well as other relevant information, such as statistics about the specific game and the player featured in the clip. A LeBron James highlight sold for $200,000. A Zion Williamson edition went for a little less than that. Each NBA NFT has a unique and non-hackable certificate of authenticity. Even if a nefarious person makes a perfect copy of the highlight video, it will instantly be recognized as a fake.
Beeple Art: In February 2021, a 10-second video by an artist named Beeple sold online for $6.6 million. Around the same time, Christie’s announced that it would be selling a collage of 5,000 all-digital works by the Wisconsin-based artist, whose real name is Mike Winkelmann. On March 11, 2021, it sold for a staggering $69 million.
The United States Constitution: On Thursday, November 18th, 2021, Auction house Sotheby's sold a digital copy of the United States Constitution for $41 million. With fees and buyer's premium included, the final price was $43.2 million.
Twitter: In July of 2021, Twitter gave away 140 special Non-Fungible Tokens. Twitter dedicated an entire day to giving away non-fungible tokens (NFTs). The site announced that it would give away 140 NFTs through Rarible, a platform where these digital assets are bought and sold. You did not have to bid. People simply had to reply to the advertised thread on Twitter.
Macy’s Thanksgiving Day Parade: The famed parade’s 95th run will feature Collectible Balloons on non-fungible tokens (NFTs). In collaboration with the Make-A-Wish Foundation, the department store is releasing a series of parade-themed non-fungible tokens (NFTs) on November 25, Thanksgiving Day. The collection of 9,500 NFTs will be sold through Sweet’s NFT marketplace, built atop the Polygon blockchain. A percentage of their resale profits will be donated to the Make-A-Wish Foundation. The NFTs will feature some of the parade’s iconic, giant balloons dating to the 1920s. Macy’s is also individually auctioning off 10 “Ultra Rare” NFTs from Nov. 19 to Nov. 30, with all earnings also going to the Make-A-Wish Foundation.
Virtual Real Estate: A Californian real estate agent bought and renovated a duplex and then got a graphic artist to make a digitalized replica of it that turned into an NFT. The person who purchased the NFT also got the house that inspired the artwork.
Where do you buy or sell NFTs?
NFTs are mostly sold on specialized marketplaces like Zora, Rarible, and Opensea. CryptoCurrency exchanges such as Coinbase are developing peer-to-peer marketplaces that will make minting, purchasing, showcasing, and discovering NFTs easier than ever. Games and sports collectibles are sold through various blockchain platforms. Examples are Football on Sorare, Formula One Collectibles on F1 Delta Time, NFL Moments and Heroes on NFL Dapper Labs, NBA Highlights Collectibles on NBA Top Shot. Horse Racing on DeRace.
What can you do with NFTs once you buy them?
Some owners of NFTs display their digital artworks on large curved or flatscreens monitors. Some buy virtual real estate NFTs to build virtual galleries or museums.
How to Buy NFTs
You can purchase NFTs via your cryptocurrency account. Currently, most NFTs are Ethereum-based tokens. As such, most marketplaces for NFTs accept only Ethereum-based tokens as payment. If you want to know more about Ethereum.... Go here. Smart Contracts
Taxes…ok what do I owe?
Also, as with all investments, you must consider the impact of taxes. We strongly recommend you consult with a Tax Professional.
Non-Fungible Tokens (NFTs) are subject to the same tax laws as ‘fungible’ Cryptocurrency. The IRS treats CryptoCurrency like stocks, bonds, and other capital assets. Like these assets, the money you gain from CryptoCurrency is taxed at different rates, either as capital gains or as income, depending on how you got your CryptoCurrency and how long you held on to it. If you’re holding crypto, there’s no immediate gain or loss, so the CryptoCurrency is not taxed. Tax is incurred when you sell the asset, and you subsequently receive either cash or units of another cryptocurrency: At this point, you have “realized” the gains, and you have a taxable event. Transactions that result in a tax are called taxable events. Those that don’t are called non-taxable events.
Tax Guidelines: NOT TAX ADVICE.
Buying crypto with cash and holding it: Just buying and owning crypto isn’t taxable on its own. The tax is generally incurred when you sell, and its gains are “realized.”
Donating crypto to a qualified tax-exempt charity or non-profit: If you give cryptocurrency directly to a 501 (3) charitable organization, like GiveCrypto.org, you may be able to claim a charitable deduction.
Receiving a gift: If you’re lucky enough to get crypto as a gift, you’re not likely to incur a tax until you sell or participate in another taxable activity like staking.
Giving a gift: If you transfer crypto to someone else outside of a purchase for goods or services, it may count as a gift. Consult with a Tax Professional.
Transferring crypto to yourself: Transferring crypto between wallets or accounts you own isn’t taxable. You can transfer over your original cost basis and date acquired to continue tracking your potential tax impact for when you eventually sell. Don’t confuse this with converting crypto to another.
Selling crypto for cash: You’ll owe taxes if you sell your assets for more than you paid for them. If you sell at a loss, you may be able to deduct that loss from your taxes.
Converting one crypto to another: Be careful with this one. When you use bitcoin to buy ether, for example, you technically have to sell your bitcoin before you buy a new asset. Because this is a sale, the IRS considers it taxable. You’ll owe taxes if you sold your bitcoin for more than you paid for it.
Spending crypto on goods and services: If you use bitcoin to buy a pizza, for example, you’ll likely owe taxes on the transaction. To the IRS, spending crypto isn’t that much different from selling it. You need to sell the asset before it can be exchanged for a good or service and selling crypto makes it subject to capital gains taxes.
Earning staking rewards: Staking rewards are treated like mining proceeds: taxes are based on the fair market value of your rewards on the day you received them.
Earning other income: You might earn a return by holding certain cryptocurrencies. This is considered taxable income. Although this is sometimes referred to as interest, the IRS treats it differently than interest you'd earn from a bank. Consult with a Tax Professional.
Getting an airdrop: You might receive airdrops from a crypto company as part of a marketing campaign or giveaway. Getting an airdrop is taxable as income, and you’ll need to report the amount in your taxes. See the latest IRS guidance on airdrops .
Receiving other incentives or rewards: Free Crypto for taking lessons and improving awareness. Such as rewards from Coinbase Earn, Coinmarketcap and CoinDesk.
Should You Invest in NFTs?
It really depends on your financial situation and your risk tolerance.
NFTs are risky. You will not find historical returns such as 5 year or 10 year historic returns. Simply stated, we don’t yet have a lot of history to judge their performance.
Non-Fungible Tokens (NFTs) are highly speculative. If you buy an NFT… its resale may be for less than you paid for it. Or you may not be able to resell it at all if no one wants it. So, you want to be sure the NFT has personal meaning for you. A Picasso painting with oil on canvas may be worth just as much as a Picasso drawn with pencil on paper.
The medium is a small factor in determining the valuation of a collectible, so as you evaluate NFTs, don’t invest in them because they are NFTs. Invest because you believe the asset itself will appreciate.
Consider investing small amounts until you are comfortable and fully understand what you are doing.
Always consult with a financial professional that is very knowledgeable on this topic...not all are.
References and Resources
Photo Credit: Le sorelle Gioconde dell’orbitale 29, 2020, by Daïm Aggott-Hönsch, is a speculative digital remix of the Prado Mona Lisa, 1503–16, by Leonardo da Vinci’s workshop. | Source: https://www.1stdibs.com/blogs/the-study/nft-art/
Business Insider. Joe Cotez. 'Fungible: What the 'F' in NFT stands for and why it matters' | Nov21| https://www.businessinsider.com/fungible-meaning
CoinBase, ‘What is a non-fungible token (NFT)?’ | https://www.coinbase.com/learn/crypto-basics/what-are-nfts
CoinDesk, Nov 19, 2021 at 9:25 a.m. EST, Macy’s Thanksgiving Day Parade Gets in on NFT Craze With Collectible Balloons | https://www.coindesk.com/business/2021/11/19/macys-thanksgiving-day-parade-gets-in-on-nft-craze-with-collectible-balloons/
Internal Revenue Service (IRS), 'Virtual currency: IRS issues additional guidance on tax treatment and reminds taxpayers of reporting' obligations | https://www.irs.gov/newsroom/virtual-currency-irs-issues-additional-guidance-on-tax-treatment-and-reminds-taxpayers-of-reporting-obligations
Coinbase, 'Do I owe crypto taxes?"https://www.coinbase.com/learn/crypto-basics/understanding-crypto-taxes
IRS, 'Frequently Asked Questions on Virtual Currency Transactions' | https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions
Investment Analyst Association,® ‘Investing in NFTs: Why It Matters’