What Are NFTs? Non-Fungible Tokens Explained

Non-Fungible Tokens (NFTs) have seemly come out of nowhere. They have taken the form of art, music, comic books and even memes, ranging anywhere from nothing to millions of dollars.

Just like crypto, there seem to be differing opinions on them. Some believe it’s a bubble that will pop, others believe they are here to stay.

So what are NFTs

NFT stands for a non-fungible token, essentially a digital asset with a unique and non-interchangeable unit of data stored on a digital ledger using blockchain technology. This essentially means NFTs contain a code to guarantee their uniqueness and prove who owns them.

NFTs have a stark contrast to other digital creations which are almost unlimited and be copied. The Uniqueness of each NTF has resulted in them becoming collectables holding value the same as Art. Arguably the most famous is the Bored Ape Yacht Club, with the highest going for $716,000. You could even get your hand on some comic book NFTs on VEVE, allowing you to own and flick throw virtual pages of your favourite comics.

How is an NFT different from cryptocurrency?

Physical money and cryptocurrencies are “fungible,” meaning they can be traded or exchanged for one another. This means that if you have $1 it can be traded for $1, if you have a certain amount of Bitcoin it can be exchanged for the equivalent amount of Bitcoin. An NFT does not have the same value as another. Each NFT is unique and valued differently based on perceived value and demand.

What are NFTs used for?

NFTS provide artists with a new way to sell their works and monetize their wares. Traditionally, artists had to go to an auction or a gallery in order to sell their pieces. NFTs on the other hand can sell their work directly to the buyer. In addition, artists can keep the majority of the money and save themselves from paying large amounts of the commission going down the traditional route.

How to buy an NFT?

Today, most NFTs are purchased with ether (ETH), the native currency of the Ethereum network, which can be converted from U.S. dollars on exchanges like Coinbase and Binance.

Blockchain networks such as Ethereum and Solana let users build apps that can store personal data and set rules for complex financial transactions. These are called smart contracts, which are digital contracts stored on a blockchain that are automatically executed when certain conditions are met, like when an NFT transfers ownership and the original artist receives royalties.

In order to buy NFTs, you will need to establish a digital wallet to store your cryptocurrency. You can connect to the marketplace where you plan to buy NFTs. Usually, NFTs are often sold through an auction system where you will put in a bid for the NFT. Some sites like OpenSea offer an option to buy the NFT now for a set price.

Where to buy an NFT?

VEVE NFT
Comic book NFT “The Amazing Spiderman”

Want an idea of how fast is the market growing? Research released in January  2022 from Emergen Research shows that the global NFT market size is expected to reach more than $3.5 trillion in 2030. It is important to note that there are accounts of fraud and scams, and also commissions vary largely depending on the marketplace. Therefore, if you wish to buy you must be wary

There are several NFT marketplaces. The largest one is OpenSea which primarily uses Ethereum. The marketplace allows you to buy, sell, auction and create NFTs. There are other marketplaces which are more specific for example AIRNFTs for music.

Are NFTs taxed?

With the fast-moving landscape, Crypto and NFTs can fall into grey areas. While there seems to be plenty of new information. NFTs are still rather new and can fall under two criteria. If you sell an NFT for profit, you may be subject to capital gains tax. If you are an artist who creates and sells NFTs, you could be subject to income tax.

The HM Revenue and Customs (HMRC) has seized three Non-Fungible Tokens (NFT) as part of a suspected defrauding case said to be around £1.4 million. It is the first UK law enforcement to seize an NFT

Last Remarks

NFTs have granted greater freedom and opportunities for creators and investors alike. While some may say it is a bubble that will burst and others state it is here to stay, it is impossible to say with any guarantee. However, with cryptocurrencies becoming more accepted as legal tender, and the NFT market growing at a remarkable rate, It is important to beware of the tax liabilities and regulations being implemented.

Additional Sources 

https://www.forbes.com/advisor/investing/cryptocurrency/nft-non-fungible-token/

https://www.creativebloq.com/features/what-are-nfts 

https://www.investopedia.com/non-fungible-tokens-nft-5115211

 

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