In 2012, Meni Rosenfield published a geeky tech paper where he imagined a method for representing and managing real-world assets on the Bitcoin blockchain. Two years later – using this concept – the first “official” NFT was minted by digital artists Kevin McCoy and Anil Dash. (It was a short video clip of McCoy’s wife Jennifer).
What are NFTs?
They have been around for a decade already, but what exactly are NFT’s again?
It stands for Non–Fungible Token, and I needed to look up 2 of the 3 words. ‘Fungible’ is legal mumbo-jumbo that means interchangeable – things are fungible because they are identical to each other for practical purposes. (Our individual Shopify shares are fungible).
Something that is non-fungible is one of a kind; it has no equivalent. Assets like diamonds, land, or paintings.
Token is trickier to define. It is an object that represents something else – and that “something else” can be anything – atoms, electrons or even an abstract concept. I might give you a physical gift as a token of my appreciation.
Like everything in the world of crypto, all that technical lingo doesn’t help much – but an NFT is simply a digital asset (electrons) that represents a real-world object made of atoms (like art, music or memorabilia). What makes it impossible for a luddite like me to understand is that they are mostly traded on the Blockchain using cryptocurrency, and are encoded with the same underlying tech as most cryptos.
By assigning a unique token to a thing, its ownership (not the thing itself!) becomes digitally secure and tradeable without any trust issues. (Which is very ironic, since about 11 people in the world understand how the Blockchain works, but we are all supposed to trust that it can be trusted?)
Tyler Winklevoss (one of the handsome twins from that movie about Facebook) has a perfect summary of what an NFT actually is: A monetised meme.
The Pros & Cons of NFTs
But, as with everything in life, NFTs come with their own set of pros and cons. Let’s start with the good stuff:
The Upside
One of the biggest wins for NFTs is the democratization of art. In the old days (and by that, I mean before 2017), the art world was like an exclusive club—where only a handful of people had access to buy, sell, and collect valuable pieces. NFTs have smashed that gate wide open.
Now, anyone with a computer and an internet connection can mint their own digital art, sell it to the highest bidder, and even earn royalties every time it changes hands. For artists, this is revolutionary. It’s no longer about who you know or how well-connected you are in the art scene. If your work resonates, it can find a buyer.
And it’s not just about selling art. NFTs are giving creators control over their intellectual property in ways that were never possible before. Think about it—musicians, writers, and other creatives can tokenize their work, retain ownership, and make money off of it without needing a middleman. It’s like the ultimate DIY approach to creative independence.
The Downside
But before we all start celebrating this brave new world of digital ownership, there’s a big elephant in the room—environmental concerns. The blockchain technology that powers NFTs, particularly the ones minted on the Ethereum network, is notoriously energy-intensive.
How bad is it? Well, every time an NFT is minted, it can consume the same amount of electricity as an average household uses in a few days. Multiply that by the thousands of NFTs minted every day, and you’ve got a carbon footprint the size of a small country. For those of us trying to teach our kids about the importance of recycling and reducing waste, this is a tough pill to swallow.
There’s also the issue of accessibility. While NFTs might be democratizing art to an extent, the high costs associated with minting and selling can still be a barrier for many creators. And let’s not forget the volatility of the crypto market. One minute, your NFT might be worth a small fortune; the next, it could be practically worthless. It’s a bit like playing a game of musical chairs, where the music could stop at any moment—and someone’s going to be left standing without a seat.
The Rise of NFTs in Social Media
Whatever they are, the NFT market was valued at a staggering $41 billion in 2021 alone (very close to the total value of the entire global fine art market). As with all volatile, poppy-like assets, the market has fallen off a cliff in 2022 – but this hasn’t stopped Meta from doubling down on the digital collectibles. After a test launch in May, Zuckerberg announced this week that NFTs will now be available on both Facebook and Instagram.
Users can post their NFTs on Facebook and Instagram by including them in their feed and messages, as well as in augmented reality stickers in Stories. (My kids had to explain this one to me). The NFT creators and collectors are automatically tagged for attribution. You can’t trade them on these apps yet, but there are rumours Meta is working on a marketplace…
Despite the decline in 2022, there are signs that the market might be on the cusp of a revival. Towards the end of 2023, the NFT market showed some recovery, bolstered by factors like the resurgence of Bitcoin Ordinals and the growing popularity of the Solana NFT ecosystem. Analysts are cautiously optimistic about 2024, predicting that the NFT market could generate around $2.4 billion in revenue.
Tax Implications of NFTs
As with all cool things, I nerdify them by worrying about the tax implications. Will the creators or owners of NFT’s have to charge any kind of tax? If so, who will they have to pay the tax to? And in what currency?
In the USA, each State owns its own tax law (it’s not governed federally), and so far, only Washington has provided guidance on the taxability of NFT’s for sales tax purposes. As other states undoubtedly develop regulations, it is highly recommended that sellers consider the state sales tax liability early in the process, rather than later during a pesky sales tax audit (that will take place in the real world, not the metaverse!)
The good news is, it won’t be easy for the tax office – NFTs are electrons that are mostly purchased with crypto, so there is no customer billing address or physical shipping location to which sales can be connected. Many NFTs are sold on marketplaces (with Meta’s probably coming soon), so marketplace facilitator rules may apply in many cases. (But beware: if the marketplace isn’t complying, the tax liability still falls on the seller).
NFTs are a new commodity in the early stages of their evolution and it is reasonable to expect more detailed guidance from tax offices regarding their taxability, so NFT sellers should consult their local tax geek to stay in the know.
Wrapping Up: To NFT or Not to NFT?
In a world where digital innovation is constantly reshaping our reality, NFTs have emerged as both a groundbreaking opportunity and a contentious subject. They offer artists and creators unprecedented control and the ability to monetize their work in ways that were unimaginable a decade ago. Yet, they also come with significant challenges—whether it’s the environmental impact, the volatile market, or the looming uncertainties around regulation.
As a dad trying to make sense of this digital gold rush, the key takeaway is to approach NFTs with a mix of curiosity and caution. They might just be the future of digital ownership, or they could fizzle out as a speculative bubble. Either way, they’ve already left their mark on the tech world and are worth keeping an eye on, even if you’re just figuring out what the heck “fungible” means.