What are NFTs & how do they work?
Whether you're new to the crypto world, or have been around for a while, you'll have a brief understanding that NFTs are making some big moves and there is fair bit to learn.
From commercialisation, portability and creative protection all at once - NFT's are delivering something that we never could in the 'real' world.
Opening up the space to creatives, artists are now taking their craft digitally whilst providing them the stability to have the rights to commercialise their own art through other digital assets - making this something that no other creative IP/Art can do!
This article was created to cover a few of the main topics many are Googling away, however, if you are looking to delve into this digital world, I would recommend seeking guidance or doing further research.
But for now, let's begin.
What are NFTs?
As crypto continues to not only expand but adapt, a particular topic of conversation I want to have is around NFT's as a whole.
From what they are, what to consider, how to utilise them, how they're taxed and how to accommodate them into your world.
With FOMO being something our society constantly struggles with, I wanted to ensure that even for those a little on the crypto-curious side could relate and learn.
So to begin with, I thought I would cover the what.
NFT's are Non-fungible tokens.
This means they are a type of digital token within cryptocurrency, similar to that of Bitcoin, but unlike your standard coin, an NFT is unique.
Why so?
Well, they can't be exchanged like-for-like.
Which in laymen terms means directly exchanged with one another as no two NFT's are the same.
If you think of it like premier league football players, they're all incredibly good, they all fit within the same league, niche etc, but if we exchange one player for another, whilst they are still playing football, they're completely different players.
They might have the same track record with goals and passes, but no two players are the same.
This is the same as an NFT.
What are the key characteristics of an NFT?
Want to know some key characteristics of NFT's?
Other than being non-fungible tokens, NFT's have some other great characteristics to look out for, including:
They're Indivisible: As simple as the word states, NFT's cannot be divided into smaller units. You have to buy them as the whole item. Once again, like footballers, you cannot just buy their right leg due to their kick, you have to purchase the whole player to ensure best performance.
They're Scarce: NFT developers can develop any amount of tokens, however, they are usually limited to create a sense of scarcity and rareness.
They're Unique: NFT's have a unique set of information, not only is there a strong history behind each token, you can in fact track it back to it's original creator - and authenticate it. This also leads me to a fourth characteristic: They can't be destroyed.
They're Indestructible: Due to their authentic, traceable data, each token cannot be destroyed, removed or replicated. Ownership of these tokens is also immutable, which means gamers and collectors actually possess their NFTs, not the companies that create them.
Why are NFTs important?
Did you know that the amount spent on NFTs is in the billions and rising?
Why?
The NFT space has become increasingly popular with both crypto users and businesses alike due to the way they have changed both the gaming and collectables realm.
Due to the shift in technology when it comes to bitcoin, both gamers and collectors, such as artists, can take on the power and ability to not only become the owners of their space (without being forced out or changed) whilst making money from them!
From selling unique items within the digital space from avatars, costumes and artwork, the digital forum provides them with the ability to access a global audience of buyers without any physical interaction at all.
From royalty schemes to one-off purchases, NFT's have the ability to expand and grow, whilst not worrying about replication due to each being completely individual.
Due to this, the supply and demand is not only huge but incredibly beneficial for those within that space.
How are NFTs taxed?
Just because NFT's are new, doesn't mean they can avoid taxation...or can they?
When diving into the world of NFT's, the articles, the buying, the tokens, there is a lot of disorganised and meaningless bits of information, however, the consensus I have come to is that...it's still very confusing.
For example, if NFT's are viewed as digital art pieces and being sold for millions of dollars, it should mean that the buyer is dealing with the concern, however, there still is a grey area when it comes to paying the tax due to different localities and jurisdictions.
According to some, within the UK, NFTs fall into a tax black hole due to there being no published HMRC guidance - even though it is 100% safe to say that they are a taxable asset.
Current HMRC guidance covers the likes of bitcoin but hasn't been considering the tax treatment of tokenised assets.
Firstly, where are the NFT's even located for tax purposes? If you're UK based but buying tokens from an owner a different country, where do tax laws fall?
Even within America, the IRS has not yet issued any NFT specific tax guidance, however, they are assuming they will be treated as collectables under certain tax codes.
The various information collected more than likely states that there will be some sort of capital gains tax and regulations will be put in place at some point, but right now, due to the nature of the token and the way in which they exist, there still seems to be mixed messages.
How does ownership work with NFTs?
There is a distinction between the ownership of an NFT as a unique token vs the ownership of content that such an NFT may be associated with.
Let's say that somebody buys a piece of art from said seller, the new owner of this digital art piece may now own the art, but they do not own the exclusive rights to reproduce, put it on a t-shirt or take further pictures to sell.
Unless the original owner (the one with the ownership of the exclusive rights) transfer these rights over to the new buyer, the buyer only has the digital work for personal use only.
This might seem straightforward, however, NFT licensing is different on every digital token, therefore it's safe to assume you must read these rights before opening up your wallet.
Plus, it's always a good idea to ensure you are purchasing from an original artist and now a counterfeiter...
Some NFT projects I like...
My top 5 NFT Key Projects to get involved with:
- Opensea
A peer-to-peer marketplace selling rare digital items and collectables.
- CryptoKitties
If you're a gamer & know about NFTs, you'll know about CryptoKitties. One of the world first blockchain games, CryptoKittes is ETH-based project allowing you to collect and breed digital kittens. Each Kitty is one of a kind & you play to make friends whilst gaining access to rare abilities!
- AXIE Infinity
A Pokémon-inspired universe where anyone can earn tokens by playing skilfully and contributing to the ecosystem. Third parties can infect access all art assets, allowing community developers to create tools and experiences.
- Flow
Larger projects are already getting involved with Flow, such as NBA Top Shots, this playground was created last year and allows developers to create and trade NFTs.
- Chain Guardians
Chain Guardians vision is to enable mass adoption of blockchain gaming through creating imaginative, innovative and immersive cross-chain gaming experiences. They look to utilise collaborative work to collaboratively towards breaking through technological and ideological barriers.
Now I know about the projects, how do I buy NFTs?
There is a lot of information online when it comes to NFTs - especially for those within the creative industry turning to NFTs for their digital art pieces.
However, how do you even buy them?
Well, here's the simplest way:
- Most NFTs are Ethereum-based tokens, therefore you firstly purchase Ethereum & send it over to your MetaMask wallet.
- Connect your MetaMask to the NFT Marketplace of choice. There are many of these, and depending on the one you choose you'll purchase different types of art or collectables.
- Buy your NFT. You will either come across an auction format (most NFT marketplaces do this), therefore you will need to bid. Or some marketplaces operate more on an exchange basis.
Whilst this is the most broken down way to purchase your NFTs, there's a lot more to take into consideration, especially if you are new to the NFT or crypto world.
In Conclusion
Whilst this is top line summary around NFTs there is a lot more to take into consideration, especially if you do decide to utilise NFTs into your business trajectory or utilise it as a creative for your main source of income.
If you are interested in learning more or need support or guidance on how to utilise NFTs for your business, how to keep on top of your taxes, or just for insight into the crypto world, please don't hesitate to message me directly.
