In this article, we will explore the concept of NFTs – a digital proof of ownership that is fungible, subject to capital gains taxes, and a way to democratize investing by fractionalizing physical assets. To begin, let’s look at the basics. NFTs are a form of asset-trading, a digitally based asset, that’s sold for cryptocurrency.
NFTs are a digital proof of ownership
In a world where most of our daily items are immutable and indefinitely circulating, NFTs are a novel concept. The NFT creator sets the scarcity of the asset. For instance, if there are only a certain number of tickets available at a sporting event, the organizer can only mint a limited number of the same ticket. This would raise the value of the original asset. The creator can then sell the NFTs as an additional revenue stream. Similarly, if the NFT is created by an artist, the author of the work can earn royalties for future sales.
The NFT is most commonly associated with the Ethereum blockchain, although it has been implemented on other blockchains as well. NFTs are digital proofs of ownership, and the Ethereum blockchain keeps track of their holders and traders. While most people spell NFTs as “en eff tee,” braver individuals refer to them as “nefts.” The NFTs may be anything digital, but the current excitement surrounds selling digital art.
They can be bought with a cryptocurrency
If you have a crypto wallet, you can purchase a NFT with that currency. You need to have a signed message confirming you have the private keys to the NFT. Then, when you sell your NFT, you get resale royalties. This is how NFTs work. You can sell your NFT to anyone on any NFT market, so you can make a profit every time you sell your NFT.
You can buy NFTs with a cryptocurrency on several sites. Coinbase Wallet is the most common platform, which accepts various cryptocurrencies. To buy NFTs on its platform, you must have a cryptocurrency wallet of the same type. Ethereum-based NFT services accept Ether, which is Ethereum’s native currency. Other types of wallets include hosted wallets, non-custodial wallets, and hardware wallets.
They are subject to capital gains taxes
If you’ve sold a cryptocurrency for more than the purchase price, you’ll have to report the gains on your tax return. Even if the transaction was unrelated to the sale of another tangible item, such as shoes, the cryptocurrency is probably considered a collectible, and will likely be subject to a higher rate of tax than ordinary income. The IRS has not explicitly said that NFTs are collectibles, but many tax experts have suggested that they qualify. Among other things, NFTs are one-of-a-kind digital assets. These could be anything from tweets to GIFs.
While the IRS has not issued formal guidance on NFTs, it’s likely that the tax authorities consider NFTs to be property and therefore subject to typical rules for computing gains on property. For example, in the case of NFTs, investors would need to keep track of the price paid for a particular property and use that cost basis as a basis to calculate the tax on the gain. Unlike with property, First In, First-Out (FIFO) and Specific Identification would not apply to NFTs. Investors can also refer to the Crypto Tax Guide for information on cost-basis assignments.
They can be used to democratize investing by fractionalizing physical assets
One way that crypto com nfts could democratize investing is by fractionalizing physical assets. It’s easier to split a digital real estate asset between several owners than a piece of physical real estate, and that tokenization ethic can extend to other assets, too. Artwork, for example, does not have to be owned by just one individual; multiple owners could increase the value of the work.
For example, Edvard Munch’s painting “The Scream” sold for $120 million at Sotheby’s in 2011. A fractional NFT for this iconic work would be prohibitively expensive, limiting the number of investors who could participate. Alternatively, a fractional NFT could be divided into 10,000 ERC-20 tokens, allowing a broader range of investors to participate.
