NFT (Non-Fungible Token)
Definition
A unique digital token on a blockchain that represents ownership of a specific digital or physical asset, unlike fungible tokens where each unit is interchangeable.
Non-Fungible Tokens are blockchain-based tokens that represent unique items. Unlike Bitcoin or dollars where each unit is identical and interchangeable (fungible), each NFT is distinct. This uniqueness makes NFTs suitable for representing ownership of digital art, collectibles, gaming items, domain names, event tickets, and real-world assets.
The NFT boom of 2021-2022 was driven primarily by digital art and profile picture (PFP) collections like Bored Ape Yacht Club and CryptoPunks, with individual NFTs selling for millions of dollars. The market subsequently declined dramatically, with most speculative NFTs losing 90%+ of their value.
Beyond speculation, NFTs have legitimate use cases: digital identity and credentials, gaming items that can be traded between players, tokenized real-world assets (real estate, art), royalty payments that automatically flow to creators on secondary sales, and proof of attendance or membership.
NFTs are typically minted on Ethereum (using the ERC-721 or ERC-1155 standards), Solana, or other smart contract platforms. The NFT itself is a token on the blockchain; the actual media (image, video, music) is usually stored elsewhere (IPFS, Arweave) with the NFT containing a pointer to that content.
For tax purposes, NFTs are treated as property. Buying, selling, and trading NFTs creates taxable events. Minting an NFT for free and selling it creates ordinary income. The complex nature of NFT transactions (minting, trading, royalties) makes tax reporting challenging without specialized tools.
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Frequently Asked Questions
Are NFTs a good investment?
Most NFTs have lost significant value since their peak. Like any collectible, value depends on desirability, scarcity, and utility. Buying NFTs as pure speculation is very risky. NFTs with genuine utility (gaming, memberships) may retain value better than purely speculative art NFTs.
How are NFTs taxed?
NFTs are taxed as property. Selling an NFT for more than you paid creates a capital gain. Minting an NFT for free and selling it creates ordinary income on the full sale price. The IRS may classify certain NFTs as collectibles, subject to a higher 28% long-term capital gains rate.