Non-fungible tokens (NFT) are crypto investments bought on the blockchain. They are mentioned more in mainstream media because of the high prices people are willing to pay for them. In fact, the Canada Revenue Agency is now issuing guidance about how to classify NFTs from a tax standpoint. It's serious when the Tax Man gets involved. Let’s deep dive into the world of NFTs and learn all about what they are, how collections are formed, what the marketplaces look like, and how Canadians and Canadiens Hockey are getting into the market.
What are NFTs?
NFTs are bought and sold with cryptocurrency. The digital asset underlying the NFT is not money per se. With no empirical or intrinsic value, NFTs can be used to sell a transaction on the blockchain of nearly anything. You are not, however, buying the asset itself. The term non-fungible means that you cannot trade like-for-like. The popular analogy is that of money. If you trade $1 for another $1, you have not lost any value, so that is fungible. Non-fungible means that the underlying asset is unique and cannot be traded for its exact replica. You cannot trade Crypto-Punk #4156 for Crypto-Punk #6487 because the two assets are unique. Right now, NFTs making headlines are linked to music and art.
Buying NFT works like buying any original masterpiece but this time you get a blockchain token that is unique and non-reproducible. Most of the NFTs are minted on the Ethereum (ETH) blockchain, however there are about 13 blockchains that support NFT minting. Some of the most popular blockchains are Ethereum, Binance Smart Chain, Wax, Solona, Cardano, Tezos, and others.
These blockchains have the ability to support smart contracts that allow for minting the NFTs. Just like you mint a coin for authenticity, blockchains mint NFTs.
What are NFT collections?
NFTs are usually grouped in collections. Most collections have thousands of NFTs, but the amount varies. The NFTs are usually minted on private websites, and then sold on secondary markets like Opensea, Rarible, and other markets that we get into later. Popular NFT collections include Cryptopunks and Art Blocks. These are just two NFT projects hosted on the ETH blockchain.
Some of the most valuable collections are already worth billions of dollars. But where do you find these collections? You can use sites like Coinmarketcap. Each collection usually has a “floor price”, which is the base value at which the NFT is sold at time of minting. The goal is to make a profit which means that investors hope that the NFT price increases in time.
The NFT price can be much higher than traditional physical art but access to the NFT is much easier. Thanks to blockchain, transactions can occur instantly and do not require fancy auctions or localized sales. Being able to trade globally, around the clock, makes the markets faster, and more lucrative, and is an innovative selling feature of NFTs.
The world is your NFT marketplace
The marketplaces for NFTs are region-agnostic. That means that you can buy from whatever marketplace you want regardless of where you live. This is one of the beautiful things about cryptocurrency buying and selling because it allows for an international marketplace on art and digital productions through NFTs.
You don’t have to sell your NFT right away and can hold it as long as you want, similar to how other art is held and stored. In this case, the art is a digital work, stored on the blockchain as a unique transaction hash and can be found using the blockchain explorer by searching the unique identifier tag of the item. Every blockchain has a blockchain explorer, which is the graphical user interface (GUI) that allows people to query the transactions, assets, values, contract code, and all the interactions of the blockchain that take place behind the scenes.
Crypto and NFTs in Canada
Canada has long been using cryptocurrencies, with exchanges like the now defunct Cavirtex popping up in early 2013. More recently, the federal government has released tax guidance information from Canada Revenue Agency around buying and selling crypto. Buyers simply claim their NFT purchases as asset or capital investment purchases during tax season and complete their appropriate information using the CRA guidance.
Getting started means owning cryptocurrency
All NFTs have one thing in common: you can only purchase them with cryptocurrency. Getting started in crypto is easy because more and more facilities are enabling the purchase of Ethereum and Bitcoin, the two most popular coins. It is as easy as setting up an account somewhere like Bitstamp.net, Kraken.com, or Coinbase.com.
You can search for cryptocurrency exchanges in Canada with any search engine. Take a look at the list of options and do a little research on the exchange that works best for you. When registering, you may require document uploads to verify your account as part of the Know Your Client (KYC) process.
After that, you can deposit funds from your bank through eTransfer, bank draft or other methods. Using a credit card to fund NFT purchases is not very common in Canada. Once you have purchased some Ethereum, download a digital wallet from MetaMask. You’re ready to start shopping at any of the marketplaces.
There are many blockchains and markets out there. All of the items are stored on the blockchain as digital repository elements and have their own benefits and unique attributes.
For example, there are many marketplaces to choose from on the Ethereum blockchain. The most prominent is Opensea.io. You can sort by price, auction status, offers, new items, and a range of other filters. Besides Ethereum blockchains and markets, you can find many other options for shopping, and most of the alternative blockchains and their marketplaces are actually cheaper to use.
Another NFT marketplace is Venly, formerly known as Arkane Network. Venly accepts MetaMask and Bitpay wallets, as well as its own Venly crypto wallet. Venly can help you mint NFTs and sell them on its Shopify app that lets you sell NFTs.
Why are some NFTs so expensive?
Part of the high pricing for minting and purchasing an EFT on the blockchain is due to the high price of Ethereum. As a result, if you buy something like Wax, making transactions can cost $1 instead of $100, making it much more accessible for starting a collection. Just like art in a museum, you can have fun just browsing the pieces of art and getting a taste for what makes up an NFT, as well as how they are priced and valued!
Art is personal and its value is just as subjective. NFTs are traceable, unique, and affordable, making them a possible investment for people worldwide. If you want to invest in NFTs, it is always buyer beware. However, if you get in the market now, you may pick up a Mona Lisa for the price of a medium coffee.
Tracking NFTs using the Blockchain Explorer
In Ethereum, the most popular blockchain explorers are Etherscan.io and Etherchain.org, which you can access anytime and anywhere as long as you have an internet connection. Each NFT is assigned a specific ID that can be searched using the blockchain explorer so it’s ownership can be checked and proven, as well as the price and date and time of purchase. This is a unique ledger that allows for public verification of ownership should there be any questions about who owns the NFT.
Storing, sharing, and reselling your collection
Once you have acquired a few items, it is time to consider what you want to do with them. In Canada, there are a growing number of opportunities to share and showcase your work and get involved. In fact, the National Hockey League’s Montreal Canadiens are one of the major players joining the NFT league by launching their own series of collectibles.
Your collection can be shared on places like Etsy, or on your personal webpage or other digital repositories where files can be stored and shared. You can even use popular social media platforms like Instagram and Facebook. Even better, you can resell your NFT at any participating marketplace.