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What is an NFT

On Behalf of | May 31, 2022 | NFTs

Non-fungible tokens (NFTs) seem to be everywhere these days, from music to art and even toilet paper. Digital assets, including NFTs, have been selling like exotic Dutch tulips during the 17th-century tulip craze, sometimes for millions of dollars. Because they have recently surged in popularity and notability, many people wonder whether it is worth investing in NFTs or if they are just a fad that will soon blow over. Are NFTs here to stay, and will they change investing for the next few decades? Read on to learn more.


Understanding NFTs

NFTs are like physical collector’s items, but they are digital. They also come with exclusive ownership rights. Only one person can own an NFT at a time. Blockchain technology makes it extremely easy to verify ownership and transfer NFTs between owners. The artist who creates the NFT can choose to store more detailed information in the metadata of the NFT. Artists can sign their artwork by including a signature in the file.

What is the Point of NFTs?

It is easy to brush off NFTs as enough dumb fad, but many experts believe they may be around for a while. Understanding what an NFT is can help you decide whether it is worth your time to invest in one. NFTs are digital assets that represent real-world objects, such as a song, art, videos, albums, and in-game items. People are surprised to learn that NFTs have been around since 2014.

They are just now gaining notoriety because they have been increasingly popular, especially as a way to purchase and sell digital artwork. In 2021, the NFT market was worth an estimated $41 billion. This figure is approaching the total value of the entire international fine art movement. An NFT of Crypto artist Beeple sold for a record-breaking $69.3 million at Christie’s in 2021. Most NFTs do not sell for these astronomical values, however.

Is Every NFT Unique?

Typically, NFTs are one of a kind. At the very least, they will be a minimal run. Each NFT has a unique identifying code. In market terms, NFTs create digital scarcity. Other types of digital creations are infinite and supply. For example, when it comes to most songs, an unlimited amount of people can purchase the song for their use. NFTs are limited. When the band Kings of Leon offered an NFT of their album, they limited the number of NFTs for sale to create a higher demand for them.

Most NFTs are digital creations of something that has already existed elsewhere. A video clip from an NFL video or versions of .GIF files or other digital art popular on Instagram. Anyone can view the individual images or collection of images or videos in the NFT. Only the purchaser of the NFT owns the original NFT. The NFT has built-in authentication that also acts as proof of ownership.

There are NFTs that are essentially virtual plots of land. Many game makers have gotten creative, allowing players to purchase an in-game helmet or gun that is part of the game. There are even buyers who have spent hundreds of thousands of dollars on NFT pet rocks, which are limited and tradable assets. In the coming years, we will probably see even more unique and interesting options for NFTs.

How are NFTs Created?

NFTs are minted or created from digital objects representing intangible and tangible items, such as GIFs, graphic art, collectibles, videos, sports highlights, designer sneakers, virtual avatars, video games, music, and designer sneakers, and music. Most NFT activity takes place on the Ethereum blockchain. A person needs a Web3-enabled crypto wallet, such as MetaMask, to interact with Ethereum. MetaMask has a mobile application and a browser extension. You will need ETH in your wallet to perform transactions on Ethereum. This will allow you to pay for blockchain network or “gas” fees and obtain ETH on an exchange such as Coinbase.

Open-source standards are used with NFTs on Ethereum. You can hold them in your crypto wallet. When you mint your NFT, you are not tied to a specific platform. You will be able to use any platform or tool when creating your NFT. You can create an NFT on one platform, then display and sell it on another platform without the NFT moving out of your wallet. There is a way to avoid paying gas fees on some platforms, such as OpenSea. Some platforms are invite-only, and others provide easy step-by-step instructions for minting NFTs.

How to Sell NFTs

Most platforms allow you to list and sell NFTs. Once you have created or minted your NFT, you will have the option to list it for sale on a blockchain marketplace. You can transfer and sell your NFT on multiple marketplaces, with each marketplace having its fee structure. When you list your NFT for sale, you will be able to provide some details on the transaction, such as the auction time, price, and the types of cryptocurrencies you will accept as payment.

The marketplace will calculate your “gas fees” if you have them. The marketplace may have a fee for handling the sale, which is frequently a percentage of the final NFT sale price. Once you list your NFT, you will be able to manage the listing. You can promote the sale via your website, email list, or social media. While you can modify your listing, making changes or removing the listing can result in additional fees. Gas fees typically are not refundable.

Trading NFTs

Many collectors view their NFTs similarly to high-value baseball cards or other tradable collectibles. Trading NFTs is an integral part of the crypto market. If you have already purchased an NFT from the creator or another collector, you can also list these NFTs for sale. If you would like to sell an NFT on the secondary market in a separate transaction that does not involve the NFT creator, you will go through a similar process as the initial creator.

You will not need to create the digital asset, though. You will need to transfer the NFT to the marketplace where you want to sell it. Then click on sell. Once again, you will be able to see the gas fees and marketplace fees that will reduce your final take-home amount. Additionally, the original NFT creator may require royalty payments.

Knowing When to Sell Your NFTs

If you would like to sell an NFT, you may be wondering when the best time to sell will be. The right time to sell your NFT will depend on the purpose of the NFT and why you bought it or created it in the first place. Minting and selling NFTs may be the way you are paid for your work if you are a digital creator or artist. It is important to survey the interest among your patrons as a way to maximize your selling price. Remember that the gas fees will reduce your profit and could cause you to sell the NFT at a loss if you do not set the price high enough. Do not expect that your sale will automatically earn you a profit.

If your NFT has appreciated value and you do not need it anymore, selling now may be wise to take the profit and invest it in another digital asset. It is possible to lower your gas fees with the correct timing for your sale listing. You may be able to avoid days during which the Ethereum blockchain network is contested, and fees are at a high. There can be an assumption that selling NFTs is an easy way to make money. Understanding that there will be marketplace costs and gas prices, combined with some marketplace volatility, can help you build your investments and discern the best time to sell.

How Mainstream are NFTs Now?

If you ask the average person what an NFT is, they probably will not have heard of it. However, NFTs are becoming more mainstream investment items for those in the crypto world. Now that more brands are launching their own NFTs, they are becoming more mainstream. They have shown some power outside the crypto sphere, especially as more headlines about large NFT sales continue coming out.

Buyers of NFT like to own the bragging rights of the NFT, almost more than the item itself. With more investors attempting to add to their digital collection, NFTs have been in the spotlight. In 2021, trading in NFTs brought in $17.6 billion, a 21,000% increase from 2020. NFT creators have also gotten more astute at making a profit on their NFTs. In 2021, creators generated $5.4 billion in profits. NFTs may be becoming more popular as more people focus on their crypto wallets.

Over 2.5 million crypto wallets are owned by people who trade and hold NFTs. The number of NFT buyers has risen to $2.3 million from 75,000. Collectibles are currently the most popular type of NFTs. Over $8.4 billion worth of sales stems from collectibles. Gaming NFTs are also extremely popular. In addition to NFTs, crypto investors are investing in the metaverse, buying digital land and homes. The global NFT market continues to be hot, but many predict that it may not increase as sharply as it has in the past few years. However, as more big brands enter the crypto market, including Nike and Visa, they could bring new buyers into the market.

Are NFTs Always Digital?

Some have tried to connect NFTs to real-world objects. Doing so can be a verification method. For example, a retailer may use an NFT system as a way to verify the authenticity of a particular retail product. The vast majority of objects remain digital, however. Part of the appeal of NFTs is that they can be verified, bought, sold, and displayed entirely online permanently through the blockchain.

What is a Blockchain?

Blockchains rely on a shared set of rules that are predefined. They maintain agreement on the validity of the NFTs and other information they store. Information kept on a blockchain is not located in a single location. It is located across a network of multiple computers that share the same copy of historical data.

Any information kept on the blockchain cannot be modified, but it can be added to. As a result, the blockchain allows for a complete and tamper-resistant source of truth for all. NFTs use smart contracts that are also executed and stored on the blockchain. These contracts are tamper-resistant and prove the rightful owner of the item.

Should I Invest in NFTs?

As with so many investment questions, the answer to this question is that “it depends.” NFTs can be risky because the future of these investments is uncertain. They have only been available since 2014 and have only gained notoriety in the last few years. It may be worth investing in small amounts to try them out until we know more. As with all investments, investing in NFTs is a personal decision. If you have money to spare and there is an NFT you would like to have, it may be worth it, especially if the NFT holds special meaning for you.

As with any other investment, remember that the value of the NFT is based entirely on what someone will pay for it. Demand drives the NFT prices rather than technical, fundamental, or economic indicators that typically influence stock prices or form a basis for investor demand. Your NFT may resell for less than you paid for, or there may be no demand from buyers for your NFT after you purchase it. You should approach investing in NFTs as you would investing in any type of investment. Do your research and understand the risks involved. You may lose your investing dollars. Keep that in mind when you take the plunge. Doing so will help you proceed with a dose of caution that will help you as you consider investing in NFTs.

NFTs and Taxes

Unfortunately, NFTs are not immune from taxation. You will need to include all your profit from selling NFTs as part of your income on federal and state tax filings. Additionally, NFTs are subject to capital gains taxes. Like when you sell stocks at a profit, you will need to pay taxes. You will need to pay taxes when making a profit on NFTs. Unfortunately, NFTS may not receive the preferential long-term capital gains rates that stocks can use. They may be taxed at a higher collectibles tax rate than stocks.

However, the IRS has not issued a ruling yet on how NFTS should be correctly classified for tax purposes. Additionally, the cryptocurrencies used to purchase the NFT may also be taxed, especially if they have increased in value since you purchased them. When considering buying NFTS, you may want to discuss the sales with a financial professional or attorney, especially if you are concerned about paying significant taxes.

Where to Buy and Sell NFTs

It has become easier than ever to find marketplaces to buy and sell NFTs. RaribleOpenSea, and Nifty Gateway are some of the most popular choices for buying and selling NFTs. There are many other options, and the options will likely continue to expand.

What are Some of the Most Unique NFTs?

Many NFTs are made from digital music and artwork. NFT creators have gotten creative and brought some weird and wild types of NFTs. Technically, anything digital can be made into and sold as an NFT. Digitally animated stickers, digital trading cards, and more have been monetized through NFTs.

Jack Dorsey, a Twitter founder’s first tweet, sold for millions. An NFT of the source code of the invention of the World Wide Web also sold for millions. Someone created an artificially intelligent NFT that stays on the Ethereum blockchain. She learns and builds her personality as she talks to the owner, and her name is Alice. The company that created Alice will continue to build an infrastructure for more artificially intelligent NFTs.

A tennis player from Croatia sold an NFT of a small section of her arm. The owner of the NFT has a right to tattoo whatever they choose on the small section of her arm. Memes have also started selling as NFTs. Other sellers have created exclusive video games where players can find hidden NFTs to purchase the game. NFTs are similar to valuable and exclusive baseball cards and autographed memorabilia. The NBA and NFL have begun selling NFT video clips of sports plays to sports fans.

Who Would Pay Hundreds of Thousands or Millions of Dollars for a Digital Trading Card?

It can be difficult to understand why someone would pay hundreds of thousands of dollars or even millions of dollars for something essentially a digital collector’s item. Some ultra-rich buyers collect NFTs because they are niche and for bragging rights. In other cases, people pay hundreds of millions of dollars for an NFT because the sale proceeds are going to charity.

Others may believe that NFT market value will increase in value over time because it is limited and will become more in demand. Investors enjoy displaying their NFTs, trading them, or swapping them like collectible cards with other fans and collectors.

Are There Environmental Impacts From Buying NFTs?

NFTs use the same blockchain technology as other cryptocurrencies, which involves using a significant amount of electricity. As a result, they generate significant greenhouse emissions. Some artists have threatened to stop selling NFTs or have stopped selling NFTs after hearing about the negative effects NFTs could have on gas emissions. There is a significant debate on the best ways to decrease emissions from blockchain technology.

Where Can I Display My NFTs?

One of the appealing assets of collecting unique items is putting them on display for yourself and your guests. NFTs are stored in digital wallets. Others can see your NFTs. The presence of NFTs is not limited to digital frames and online marketplaces. As the metaverse expands, virtual worlds now have their own spaces or art galleries for displaying NFTs.

In Sandbox and Decentraland, people can buy digital land and organize an NFT art display exhibition and invite other users to it. After you have purchased virtual land, you can organize events to display, sell, and promote your NFT collection at art shows and auctions. People can even sell tickets for these digital events through social media platforms.

How Long Can NFTs Last?

Part of the appeal of NFTs is that they will not deteriorate, get lost, or get stolen like other collectibles. The recording of purchases and sales on the blockchain helps to ensure ownership is transferred legally. Anyone can access information on the purchase and sale of NFTs, allowing people to stay accountable. However, many people may not know that there is such a thing as bit rot.

Bit rot sounds like other types of rotting that can happen over time. It is more technical and immediate than the rotting of organic material. Even though hard disks are supremely reliable and keep on keeping on, they can still eventually lose data due to bit rot. If you were to look at a hard disk under a microscope, you would see a bumpy landscape of exotic metals arrayed in reasonably neat patterns. A jolt of electricity on a small region can change its charge to denote stored data.

These small regions can lose or change their charges, called “flipping.” When a disk flips, the data can become corrupted, erased, or rendered unreadable. The extent to which bit rot is a serious risk is debatable. Some downplay the risk it poses, but it is something to consider when investing in NFTs. Image quality can deteriorate to the point that people cannot open file formats any more. Websites can also go down. Owners can also forget their wallet passwords. Compared to fine art in museums that must be temperature controlled, NFTs seem to stand out as having more longevity.

The Difference Between a Copyright and an NFT

NTFs are unlike fungible digital assets, such as bitcoin or other types of crypto-currencies, where each digital coin is indistinguishable from another. Instead, each NTF is unique and can be verified and traced on a blockchain, such as Ethereum. When a person purchases an NTF, he or she will have a verifiable digital certificate of ownership.

Copyrights are a form of protection granted by law for original works of authorship that are fixed in a tangible medium of expression. Published and unpublished works can be copyrighted. Copyright for text the owner of a work of authorship from unauthorized use. Copyrighted works include architecture, computer software, movies, songs, poetry, novels, and more. The copyright owner can reproduce the work, distribute copies, prepare derivative works, display the work publicly, and perform the work publicly.

NFTs are not copyrights, and they are different from copyrights in many different ways. When a person purchases in NFT, they receive a unique digital certificate of ownership that is then recorded on a blockchain. The NFT represents ownership of an asset that is digital. At the same time, the real asset is often in the form of a hyperlink on the internet. As a result, ownership of an NFT of digital artwork is the owner of the right to display the NFT on a marketplace, sell the NFT, trade it, give it away, destroy it, and use it for personal non-commercial purposes. In many ways, the rights and ownership of change through and NFT are different from copyright. Ownership of the NFT does not transfer the underlying copyright without an explicit agreement.

If I Purchase an NFT, Does it Come With a Copyright?

No, you will not automatically acquire the copyrights associated with the original work underlying the NFT. When you purchase an NFT, you will have a license to use the work’s digital copy, but you do not have a license to use the work for commercial purposes. There is a way for an NFT owner to have full copyright of the underlying work that allows the owner to use it for commercial purposes. The digital governing contract that covers the sale of the NFT would need to provide for an assignment of copyright in signed writing expressly.

When there is not an express agreement giving the new owner of the NFT copyright, the copyright will stay with the original owner, who will be able to use the artwork for commercial purposes, not the NFT owner. When buying an NFT, you should carefully review the marketplace’s material terms and conditions as well as the written contract governing the sale of the NFT. With some NFT selling for a high price, it is wise for buyers to consult an experienced NFT copyright lawyer before making the final purchase. We can help you understand the terms of the agreement and what rights you will have regarding the NFC after purchasing it.

Protecting Your NFT as an Artist

If you are an artist who sells NFTs of your work, you can protect your work by registering the copyright to your work with the U.S. Copyright Office. When you register a copyright, you will be able to sue for infringement if someone uses your work without your permission. Successful plaintiffs are entitled to statutory damages and attorney’s fees. If you are not the original NFT artist, but you are assigned or transferred rights related to the work and would like to mint an NFT, it is wise to record the transform or assignment with the U.S. Copyright Office to protect yourself.

How to Avoid Being Sued for Violating Copyright

As an artist, it is always important to be aware of potential copyright violations. Sometimes an NFT artist may be unsure what type of use of another person’s work will be considered a copyright violation. This issue is compounded by the fact that companies that own intellectual property use sophisticated surveillance software. They also use human staff to find potential violations of their copyrights.

These large companies have more resources and time to bring lawsuits against potential violators in many cases. If you are an NFC artist, you can avoid being sued by consulting with an experienced intellectual property attorney. We recommend discussing your case with a copyright attorney before you mint an NFT. Doing so can help you avoid a possible copyright infringement.

Reach Out toAU LLC to Discuss Your NFT Options

Are you an investor who would like to purchase NFT? Do you have a legal question related to NFTs? Reach out to the skilled crypto attorneys atAU LLC to learn more about our services.