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).

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.

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…

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 regulation, 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.