Tax Insights

Your Guide to State, Local, Federal, Estate + International Taxation

Are nonfungible tokens the new Bitcoin?

Fungibility is the ability of an asset to be easily and readily interchanged for another like its kind. A $5 bill is fungible, whereas an owned home or a car is nonfungible. Due to the asset’s inability to be interchanged, it makes it one-of-a-kind, or unique. So, what are nonfungible tokens?

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Nonfungible tokens are digitized asset that can represent one or more text, image, video, music, artwork and/or recordings that are transferable and not interchangeable. The most common NFTs that are gaining attention are artists who have created original works who are looking to sell. These NFTs cannot be replaced and are a part of the cryptocurrency family. Other well-known members of the cryptocurrency family are Bitcoin, Ethereum and Dogecoin. Bitcoin can be used as a widespread medium of exchange and for that reason is fungible. NFTs last indefinitely, could be valued at millions of dollars, and each holds specific content that another NFT will not.

NFTs are registered online and are verifiable through a “distributed ledger” (blockchain) technology. Artists and creators are “tokenizing” their original pieces of work and selling them through online auctions. This differentiates from standard copies of work that can just be downloaded from the internet, in that an NFT may be autographed and issued with their own unique codes. For example, if someone were to purchase an NFT that included an autographed original painted portrait, no one else can ever have access to that same NFT. It’s unique and one of a kind. Another feature of NFTs is that they have capabilities to allow the creator to share in profits every time it is licensed or resold, known as a royalty agreement.

Still have questions about NFTs? Please read Henry+Horne’s blog post Potential Tax Issues with NFTs or contact a Henry+Horne professional as we wait for additional tax guidance on NFTs from the IRS.

Cierra Tate