Non-fungible tokens (NFTs) burst into the mainstream financial scene with a splash, most notably via the Beeple auction, but even though average prices might have come down from those initial levels, these cryptoassets are here to stay. Recent market volume demonstrates how quickly these instruments have become a billion dollar asset class.
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Cryptocurrency and other cryptoassets continue to rapidly evolve, develop, and become more integrated into mainstream financial markets and conversations, but the majority of investor conversation is still connected to bitcoin and other cryptocurrencies. That said, when looking under the surface, it becomes quite clear that the blockchain and cryptoasset space has evolved far beyond just cryptocurrency trends and price volatility.
Whether it is the increasing utilization of smart contracts for various enterprise applications, decentralized finance (DeFi), central bank digital currencies (CBDCs) or NFTs the underlying trend is clear; cryptoassets are evolving and becoming more sophisticated.
But, what exactly are NFTs? More importantly, how are these cryptoassets different from other forms of crypto, especially as it pertains to enterprise adoption and implemented? While every single cryptoasset is going to operate differently, and NFTs are no exception to this rule, there are several general trends that should be taken into account.
Setting aside the previous discussion around the price per individual NFT, let’s take a look at just what investors and entrepreneurs should know about these cryptoassets.
Unique and distinct. As the name would seem to indicate, each and every NFT is a distinct and unique asset, which differentiates them from other existing forms of crypto. Be it decentralized crypto such as bitcoin, privately issues and managed stablecoins, or even the potential for a CBDC, every single one of these crypto are fungible in nature. Without diving too much into the minutia of accounting terminology, this means that every single crypto can be exchanged for each other as equivalent items.
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Non-fungible tokens are not able to be freely exchanged for one another, since each NFT represents a unique piece of cryptographically secured data. This also means that, unlike other crypto, NFTs are not normally used as a medium of exchange, nor were they designed to be used in such a manner in the first place.
Tax implications. As with every other form of cryptoasset the tax scenarios around NFTs are complicated and subject to rules that can – and most likely will – change. That said, the current tax treatment around crypto means that every single time a cryptoasset is exchanged, changes ownership, or is otherwise transferred between different counterparties there is an income tax event generated.
Even if there is no gain that generates a tax liability, the reporting and compliance issues still do exist; this further mitigates against NFTs being used for transactional purposes.
Monetization. The initial concept of an NFT was captured and utilized primarily by artists and other content creators seek to secure and protect different types of intellectual property. Artists, entertainers, musicians, and other creators of information might have been the first groups to recognize the potential of NFTs, but they are certainly not the last. One interesting new factor that has recently entered in to the conversation is the ability of NFT investors and owners to further monetize these assets.
Outside of benefitting from the price appreciation, assuming any such appreciation does occur, there is also the option for some investors to monetize NFTs and create income streams. The specifics of every royalty or income based agreement will vary from asset to asset – and is important for the creator and investor to understand – this opens the door for further refinement. Creating additional income streams, however, also creates the potential for more complicated tax scenarios and highlights the need for crypto tax planning to play a large role moving forward.
More than art. One last fact that should be mentioned is that the NFT sector is already moving far beyond simply securing artwork and other forms of artistic related content. Everything from deeds and mortgages, to commodities and rare materials such as diamonds, to personally identifiable information (PII) can – and is – being positively impacted by the growing size of the NFT sector.
Protecting and securing data is an integral part of any successful business or economic sector, and NFTs represent a quantifiable step forward toward making the security of blockchain more accessible, understandable, and available for individuals and organizations across the economy.
NFTs might have burst out into the mainstream economic conversation as a direct result of the price levels achieved by several of the initial auctions. Setting aside those, albeit exciting, headlines the underlying message has other stronger economic fundamentals. NFTs may have been traditionally associated with artwork and other creative content, but have potential implications across a wide swath of economic sectors and areas. As with any new and creative financial instrument, but especially for cryptoassets, the individuals and firms that will benefit the most are those that are proactive and forward looking.
NFTs are here to stay, and understanding these cryptoassets is shifting from a nice-to-have, to a must-have sooner rather than later.
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Author: Sean Stein Smith, Contributor