NFTs 101
We likely all saw the headlines. A ‘crypto billionaire’ purchased an NFT artwork for a record setting $69,000,000. The art, by Beeple, was entitled “EVERYDAYS: THE FIRST 5000 DAYS”.
While it’s tempting to dismiss this as yet another fad for the ultra wealthy, NFTs present some interesting possibilities for even small businesses.
Tell me again, what, exactly, is an ‘NFT’?
NFT stands for non-fungible token. At its most basic, an NFT is essentially a digital tag that accompanies any digital asset (drawing, song, certificate) that assures it’s owner that they are holding the “original” digital asset. Accordingly, while a picture, song, drawing, on the web can be copied an infinite number of times, there is only one original.
Which leads one to ponder, “Wait. If the asset can be copied unlimited times, why would the same thing with an NFT tag be so valuable?” Proponents of the technology say that it’s no different than the intrinsic value vs the collectible value of an original anything. For instance, the cardboard and ink of a 1952 Topps Mickey Mantle rookie baseball card is, essentially, worthless. Yet because it is an original (and scarce) the card sold for $5.2 million earlier this year. Thus, proponents argue that some day, an original ‘e ticket’ for a local rock band that later makes it big will be just as much as an original ticket to the Beatles concert at Shea Stadium.
Okay. I bought an NFT. What do I do with it?
This is still the wild wild west. Futurists are suggesting that everyone will ultimately have a digital wallet - which will be public. We will be able to display our one of a kind purchases, tickets, art work, etc…. no different than displaying those same assets on our actual walls, we will proudly display them on our virtual wall.
Already some issuers of tickets have said that every virtual ticket they sell will be accompanied by an NFT certifying its authenticity.
For those of us based solidly in reality, are there any practical uses?
If you listen to those same futurists, they will tell you that eventually ordinary everyday businesses will offer NFTs for some of their products. For instance, a restaurant that has a unique tasting menu will issue a limited number of the menu - each accompanied by an NFT. Wineries, breweries, coffee roasters could provide limited edition artwork of their labels verified by an NFT. And because an NFT is unique and traceable, any business could provide an NFT that carries certain limited rights (e.g., a community theater could sell 100 NFTs which give the holder early access to every year’s season opening).
For their customers/clients, purchasing an NFT is no different than purchasing a physical asset that is accompanied by a certificate that “guarantees” them both authenticity as well as the potential for appreciation.
How might this affect my life business?
Both the financial accounting standards board and the IRS have been slow to catch up with the accounting and income tax standards for crypto currencies in general. Crypto currencies are currently treated as property. While there has been scant guidance on reporting for NFTs, the general consensus is that the reporting will be the same. (*Note that there is specific tax disclosure required for crypto transactions. Make sure that you have communicated with your tax advisors if they trade in crypto currencies or have purchased and/or issued NFTs).
What else should I know?
It’s easy to dismiss NFTs as a fad and, in all reality, that is indeed what they might end up becoming. Because NFTs are new that means that they are also newsworthy. Accordingly, there is an opportunity for the first X business that has discovered a practical use for NFTs in their business to receive press coverage.
As such, the next time you connect with your advisor, ask them their thoughts on NFTs and if they have any ideas on how you can use them in your business.