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What is an NFT? Non-fungible tokens explained

Igor Grigorchenko

News editor

Aug 27, 2022 at 10:17

To a sudden eruption of blockchain news, nothing leaves you scratching your head and wondering, “Um… what’s going on here? like that kind of news.

NFTs, or non-fungible tokens, are widely used today. These digital items, which might include everything from tacos and toilet paper to tacos and rare 17th-century Dutch tulips, are sometimes sold for millions of dollars.

Do NFTs, however, live up to the expense or the hype? Some analysts think they are a bubble that is set to burst, much like the dot-com bubble or Beanie Babies. Others believe NFTs will fundamentally change investing and that they are here to stay.

What Is an NFT?

A representation of a physical good, such as artwork, music, in-game items, or movies, is what is referred to as an NFT. They are often encoded using the same software as many other cryptos, and they are regularly bought and traded online in exchange for other cryptocurrencies.

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NFTs are thought of being modern collectibles. They are bought and sold online and act as a digital evidence of ownership for any specific object. The safe recording of NFTs on a blockchain — the same technology that underpins cryptocurrencies — ensures the asset’s uniqueness. Due to the technology, it might be difficult to change or counterfeit NFTs.

NFTs are often one of a kind, or at least one of a very short run, and have special identification codes. NFTs essentially create digital scarcity, according to Arry Yu, managing director of Yellow Umbrella Ventures and chair of the Cascadia Blockchain Council for the Washington Technology Industry Association.

The majority of digital works, on the other hand, almost always have an unending supply, which makes this starkly in contrast.

You can better comprehend NFTs if you comprehend the economic theory.

  1. Because their value is independent of their rarity, fungible goods can be traded easily. For instance, even though your new bill has a different serial number, you can swap a $1 bill for another $1 bill and keep your $1.
  2. Non-fungible things can’t be swapped out. Each token in an NFT has a different value from tokens that are comparable to it and has its own special characteristics.

In the world of art, selling NFTs has been a successful business. Here are a few instances that you may be familiar with:

  • Beeple, a digital artist, sold “Everydays — the First 5000 Days” at a Christie’s auction for $69.3 million.
  • LeBron James’ “Cosmic Dunk #29” video clip, which lasted about 20 seconds, sold for $208,000.
  • At Sotheby’s first curated NFT sale, a CryptoPunk NFT brought in $1.8 million.
  • Jack Dorsey, CEO of Twitter, auctions off an NFT of his very first tweet, which fetches $2.9 million.

How Is an NFT Different from Cryptocurrency?

Non-fungible Token is referred to as NFT. The parallels between it and cryptocurrencies like Bitcoin or Ethereum end there, despite the fact that it is often constructed using the same kind of programming.

Having the ability to be sold or exchanged for one another, physical money and cryptocurrencies are both “fungible.” Additionally, they have the same value; one dollar is always equivalent to another dollar, and one bitcoin is always worth one additional bitcoin.

NFTs are unique. NFTs cannot be exchanged for or equated with one another because they are all digitally signed (hence, non-fungible). One NBA Top Shot clip is not equivalent to EVERYDAYS just because two videos are NFTs, for example. (In fact, there are times when one NBA Top Shot footage isn’t even comparable to another.

History Of NFT

The name “Quantum” refers to the first NFT ever made. In 2014, Kevin McCoy created it on Namecoin. Over the ensuing years, a number of additional NFTs were introduced on blockchains that were not Ethereum. For instance, Spells of Genesis, the first blockchain-based game, debuted in 2015. The first crypto art market was launched in 2016 with the release of Rare Pepes.

These initiatives, however, fell short of achieving universal acclaim. Except for those who were knowledgeable about cryptocurrencies and blockchain technologies, they remained largely unknown.

Prior to 2021, there were probably two triggers that boosted price points and boosted public interest. The COVID-19 pandemic was the first, forcing a lot of individuals to become more technologically literate and interact with one another on websites like Twitter and Clubhouse, where the NFT community has established a significant presence.

Beeple was the second. The veteran artist became an NFT pioneer when he was the first to sell an NFT through a significant auction house. When his “Everydays — The First 5000 Days” Christie’s sale ended on March 11 with a staggering $69 million, NFTs could no longer be disregarded.

How Does an NFT Work?

NFTs are present in blockchain, a distributed public ledger that stores transactions. You may be most familiar with the blockchain as the platform that underpins cryptocurrencies.

NFTs are specifically stored on the Ethereum blockchain, while they can also be used on other blockchains. An NFT is “minted” from digital items that represent both physical and abstract objects, such as:

  • Grafic art.
  • GIFs.
  • Videos and sports highlights.
  • Collectibles.
  • Virtual avatars and video game skins.
  • Designer sneakers.
  • Music.

Taxes And NFT

NFTs are subject to capital gains taxes in the same way as profit-making stock transactions are.

Although the IRS has not yet determined what NFTs are classified for tax purposes, since they are collectibles, they might not be eligible for the advantageous long-term capital gains rates that apply to equities and might even be taxed at a higher collectors tax rate. If you’re thinking of increasing your portfolio using NFTs, bear in mind that if the value of the cryptocurrencies you used to purchase them has increased since you purchased them, you might also be required to pay taxes on those funds as well. This is why it can be a good idea to seek advice from a tax professional.

It’s critical to comprehend how the IRS will view NFTs in 2022. Unfortunately, the taxation of NFTs is not specifically covered by the U.S. tax code. However, there are a few guiding principles that have helped professionals to roughly understand how things function.

First off, there is a compelling case to be made that NFTs shouldn’t be classified as “collectibles” under U.S. tax law. NFTs, though, are collectibles, correct? Why then are they not taxed accordingly?

Considering that collectibles are covered by:

  • Any work of art.
  • Any rug or antique.
  • Any stamp or coin (with limited exceptions, below).
  • Any alcoholic beverage.
  • Any other tangible personal property that the IRS determines is a “collectible”.

The last item on the list makes it clear that collections must be tangible personal property by using the word “other.” NFTs may therefore constitute art, but they are unquestionably intangible. Although the verdict is still out on this, it seems quite obvious that NFTs aren’t subject to collectibles taxes.

NFTs should be considered mostly in the same way as fungible cryptocurrencies like Ether and Bitcoin, according to experts. Another rung down, cryptocurrency is equivalent to equities. In other words, it’s similar to property.

NFTs are, in essence, subject to property taxes as well, according to the IRS. Why does that matter? They are, after all, taxed on their capital gains.

What Are NFTs Used For?

Artists and content creators have a unique opportunity to monetise their efforts thanks to NFTs and blockchain technology. Artists are no longer obligated to sell their creations through galleries or auction houses, for instance. Depending on the fiat currencies your NFT provider supports, you might need to buy some cryptocurrency, such Ether. On platforms like Coinbase, Kraken, eToro, PayPal, and even Robinhood, you can now buy cryptocurrency with a credit card. It will then be possible for you to transfer it from the exchange to your selected wallet.

This is a desired feature because, generally speaking, artists don’t make any more money after their original sale.

NFTs can be used for more than just financial gain. Taco Bell and Charmin are two businesses that have auctioned off themed NFT artwork to raise money for charity. 

Surely! You have seen this image

It sprang to prominence online and has been a meme for many years. In 2005, Zoe Roth, the father of the little child in the foreground, shot the photograph.

The reality is totally different from how she appears to be acting and what the fire in the background suggests — it wasn’t something she created and was celebrating.

Walking through Mebane, North Carolina’s streets, the two saw firefighters putting out the fire as they were in the United States.

But it was really a simulated controlled fire set up for training. The 21-year-old sold the photograph for $470,000 after transforming it into an NFT.

How to Buy NFTs: Popular NFT Marketplaces

The following necessities must be purchased if you want to start your own NFT collection:

  • To store cryptocurrencies and NFTs, you must first invest in a digital wallet.
  • As you investigate your alternatives, keep fees in mind. Most exchanges charge a fee for buying cryptocurrencies, usually at least a fraction of the price.

Well-known NFT Marketplaces

After setting up and funding your wallet, there are a ton of NFT sites to choose from for your shopping. The biggest NFT marketplaces at the moment are:

  • io, which describes itself as a seller of “unique digital products and collectibles.” You only need to create an account to begin browsing NFT collections. To find new artists, you can also sort the works by how many people bought them.
  • Rarible: Rarible is a democratic, open marketplace that permits artists and creators to issue and sell NFTs, much to OpenSea. Holders of RARI tokens issued on the platform can comment on aspects like fees and community regulations.
  • Foundation: In order to submit their artwork, artists must first earn “upvotes” or invitations from other creators. The community may showcase higher-caliber artwork due to its exclusivity and high entry barrier (artists must also pay “gas” to mint NFTs). Chris Torres, the developer of the Nyan Cat, for example, marketed the NFT on the Foundation platform.

Note: Investors should exercise caution since the expensive and widely reported NFT craze is luring con artists. Some people might try to sell you anything while falsely representing it as an NFT. Some people might assert that they have the right to sell an NFT of a piece of work that they don’t own or have any ownership over.

The verification processes for creators and NFT listings vary amongst platforms; some are harsher than others. For NFT listings, OpenSea and Rarible do not demand owner verification, for instance. When purchasing NFTs, it may be wise to remember the proverb “caveat emptor” (let the buyer beware), as consumer safeguards seem to be minimal at best.

Having said that, treat NFTs as you would any investment: do your homework, understand the dangers, including the possibility that you may lose all of your investment money, and if you decide to proceed, exercise good judgment.

KEY TAKEAWAYS

  • Non-fungible tokens (NFTs) are special cryptographic tokens that are only available on blockchains and cannot be duplicated.
  • Real-world objects like artwork and real estate can be represented by NFTs.
  • By “tokenizing,” these tangible real-world assets may be bought, sold, and traded more effectively while having a lower chance of fraud.
  • NFTs can be used to represent a variety of things, including peoples’ identities and property rights.
  • NFTs have drawn the attention of collectors as their value, which first rose but has now calmed.

Intriguing Right?

NFTs have taken over the world of digital goods and art. Due to significant sales to a new crypto-audience, the livelihoods of digital musicians are changing. Would you like to master Blockchain Technology? Become fully informed here.

(с) The article is written by Favour Obajemu, 2022

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