What is a non-fungible token?
Mike Winkelmann, known as Beeple, sold his product as NFT. The JPEG image "Everydays: The First 5,000 Days" was sold for $ 69.4 million, the highest price paid in an NFT.
The work is also the third most expensive work among living artists. So what is this Non-Fungible Token, and how expensive is it?
A Non-Fungible Token is a single token that is encrypted on the blockchain network. As it is known, bitcoin is a changeable coin, but NFTs cannot be changed.
Non-fungible tokens, or NFTs, are the latest cryptocurrency phenomenon to go mainstream. And after Christie's auction house sold the first-ever NFT artwork — a collage of images by digital artist Beeple for a whopping $69.3 million last week — NFTs have suddenly captured the world's attention.
The most important feature of NFT is that it is a unique and proprietary asset. In the simplest terms, tokens are different from normal coins because they are produced in different values and originality that cannot be interchanged.
Like physical money, cryptocurrencies are fungible i.e., they can be traded or exchanged, one for another. For example, one Bitcoin is always equal in value to another Bitcoin.
Similarly, a single unit of Ether is always equal to another unit. This fungibility characteristic makes cryptocurrencies suitable for use as a secure medium of transaction in the digital economy.
NFTs shift the crypto paradigm by making each token unique and irreplaceable, thereby making it impossible for one non-fungible token to be equal to another.
They are digital representations of assets and have been likened to digital passports because each token contains a unique, non-transferable identity to distinguish it from other tokens. They are also extensible, meaning you can combine one NFT with another to “breed” a third, unique NFT.
Just like Bitcoin, NFTs also contain ownership details for easy identification and transfer between token holders. Owners can also add metadata or attributes pertaining to the asset in NFTs.
For example, tokens representing coffee beans can be classified as fair trade. Or, artists can sign their digital artwork with their own signature in the metadata.
NFTs evolved from the ERC-721 standard. Developed by some of the same people responsible for the ERC-20 smart contract, ERC-721 defines the minimum interface – ownership details, security, and metadata – required for exchange and distribution of gaming tokens.
The ERC-1155 standard takes the concept further by reducing the transaction and storage costs required for NFTs and batching multiple types of non-fungible tokens into a single contract.
Perhaps the most famous use case for NFTs is that of cryptokitties. Launched in November 2017, cryptokitties are digital representations of cats with unique identifications on Ethereum’s blockchain. Each kitty is unique and has a price in ether.
They reproduce among themselves and produce new offspring, which have different attributes and valuations as compared to their parents. Within a few short weeks of being launched, cryptokitties racked up a fan base that spent $20 million worth of ether purchasing, feeding, and nurturing them. Some enthusiasts even spent upwards of $100,000 on the effort.
While the cryptokitties use case may sound trivial, succeeding ones have more serious business implications. For example, NFTs have been used in private equity transactions as well as real estate deals.
One of the implications of enabling multiple types of tokens in a contract is the ability to provide escrow for different types of NFTs, from artwork to real estate, into a single financial transaction.
In the simplest terms, NFTs transform digital works of art and other collectibles into one-of-a-kind, verifiable assets that are easy to trade on the blockchain.
Although that may be far from simple for the uninitiated to understand, the payoff has been huge for many artists, musicians, influencers and the like, with investors spending top dollar to own NFT versions of digital images.
For example, Jack Dorsey's first tweet is now bidding for $2.5 million, a video clip of a LeBron James slam dunk sold for over $200,000 and a decade-old "Nyan Cat" GIF went for $600,000.
But NFTs aren't exactly new. CryptoKitties, a digital trading game on the cryptocurrency platform Ethereum, was one of the original NFTs, allowing people to purchase and sell virtual cats that were both unique and stored on the blockchain.
Can NFTs be taxed?
NFTs are considered "collectibles." And collectibles – which can include art, cards and rare items – are labeled alternative investments by the IRS.
If sold at a gain, NFTs are subject to the long-term capital gains tax rate for collectibles, which is 28%. The Taxpayer Relief Act of 1997 lowered the maximum capital gains rate on proceeds from the sale of most assets to 20%, but left the maximum rate of 28% on gains from the sale of collectibles.
The distinct construction of each NFT has the potential for several use cases. For example, they are an ideal vehicle to digitally represent physical assets like real estate and artwork.
Because they are based on blockchains, NFTs can also be used to remove intermediaries and connect artists with audiences or for identity management. NFTs can remove intermediaries, simplify transactions, and create new markets.