Beeple's "Everydays: The First 5000 Days" NFT shattered records in early 2021 when it sold for nearly $70 million in a Christie's auction. More recently, Rarible raised $14 million to mainstream the digital creator economy with its NFT-based platform, making it easier than ever for artists to publish their works and sell them via NFTs.
NFTs have made it easier than ever for artists to monetize their artwork without paying high fees to intermediaries. Let's examine how non-fungible tokens (NFTs) are taking the art world by storm, what NFT art is, how to create NFT art, and the tax implications to keep in mind when using them.
NFT Crypto: What is NFT Art?
Digital artwork has always been a challenge for artists. Musicians, actors, painters, and other artists pay exorbitant fees to sell their work on digital (and even analog) platforms while developers selling virtual items face widespread piracy. These issues stem from an inability to track ownership and verify authenticity without resorting to an intermediary.
What does “NFT” mean?
Blockchain technology provides a clever solution to the problem. While cryptocurrencies are fungible, meaning that they are interchangeable, non-fungible tokens (NFTs) represent unique digital assets. As a result, artists can use NFTs in the form of NFT art to create and sell unique digital representations of their artwork without worrying about piracy.
NFTs also provide a host of other benefits:
- Standardization: Multiple digital assets can live on the same blockchain standard (e.g., ERC-20). These standards enable NFTs to move across different ecosystems and achieve better liquidity.
- Tradeability: NFTs can trade on open marketplaces where they can be sold via auctions, bundling, or other methods in any currency, such as stablecoins or application-specific tokens.
- Security: Smart contracts enable developers to place hard caps on the supply of NFTs and enforce persistent, immutable properties after minting the tokens.
- Flexibility: NFTs are fully programmable to achieve nearly any goal. For example, CryptoKitties have a breeding mechanism built into the contract, while gaming NFTs have complex mechanics.
How to Buy NFTs
NFTs can be bought and sold on platforms, like OpenSea, using crypto or fiat currencies.
There are many examples of successful NFTs:
- CryptoKitties have sold for as much as $140,000, while the underlying business raised upwards of $12 million.
- NBA's Top Shot program sold a LeBron James dunk moment as an NFT for $208,000.
- Beeple's "Everydays: The First 5000 Days" sold for nearly $70 million in a Christie's auction.
The technology could also help artists unlock new business models. For example, artists could embed a smart contract that entitles them to 10% of any future sales of the artwork. If their artwork appreciates, they (or their heirs) can benefit from the appreciation rather than leaving all of the profits to wealthy art collectors or dealers.
How to Create NFT Art?
Non-fungible tokens are specific types of tokens on a blockchain. For example, the first NFTs were ERC-721 tokens on the Ethereum blockchain, an inheritable Solidarity smart contract standard. The FLOW blockchain is another popular blockchain for NFTs that uses lower energy proof-of-stake methods rather than proof-of-work algorithms.
While it's possible to create a smart contract to support NFTs, most artists use one of the many existing NFT platforms to streamline the process. The most popular NFT platforms include OpenSea, Rarible, and Foundation, with more options coming out every year. Each venue offers unique advantages and disadvantages to consider.
How do you make an NFT? There are typically a few steps:
- Sign up and connect a digital wallet.
- Upload a digital asset and make an NFT.
- List the digital item for sale using a fixed price or auction.
- The marketplace transfers the assets and funds when complete.
If you're interested in making your own NFT marketplace, the easiest way to get started is with ready-made tools. For example, the OpenSea SDK lets developers build their marketplace from scratch and integrate it within their applications. Alternatively, you can create an NFT marketplace from scratch using Ethereum or other blockchains.
Buying NFT Art: Tax Implications
What is NFT art in the eyes of the IRS?
The IRS hasn't provided specific tax guidance for NFTs, but they're likely to be treated as collectibles under Section 408(m)(2). While typical capital gains tax rates top out at around 20%, the collectible tax rate is 28% for high net worth individuals, who may also have to pay a 3.8% net investment income tax on any NFT gains.
NFT art creators are subject to ordinary income and self-employment taxes, but they can deduct ordinary and necessary business expenses to offset that income. On the other hand, ETF buyers are subject to capital gains taxes on the Ether (or other tokens) they used to make the purchase and must pay taxes on any future sale of the NFT.
ZenLedger makes it easy to track cryptocurrency gains and losses across all of your wallets and exchanges. In addition to typical crypto assets, the platform automatically accounts for NFTs, DeFi, and other unique types of crypto investments that can be challenging to quantify.
Looking Beyond NFTs
Where is NFT art headed in the future?
Most non-fungible tokens are limited to collectibles, but blockchain technology could play a broader role for artists.
For example, the Open Music Initiative (OMI) is a non-profit that aims to leverage blockchain technology to identify rightful music holders and originators so they can receive fair royalty payments. That way, musicians wouldn't have to pay such high royalties to intermediaries and wait a whole year to receive their earnings, which is the current status quo.
Checklist of Top NFT Platforms
Some of the most popular NFT crypto tokens include:
The Bottom Line
Cryptocurrencies are transforming everything from finance to logistics. What is NFT art? Non-fungible tokens (NFTs) are unique digital representations of artwork that artists can use to monetize collectible versions of their work, such as original paintings or records. Still, they're just scratching the surface of what's possible with blockchain technology.