7727.01 / What is a non-fungible token (NFT)?

Non-fungible tokens are a type of unique digital asset or digital file. A non-fungible token, or NFT, can represent any type of real-world items, including artwork, images, recordings, gaming awards or other files. These digital assets can last indefinitely and can be sold or exchanged like any other piece of property. These digital assets have recently become extremely popular due to purchases by celebrities and are typically bought and sold online (popular sites include OpenSea and Rarible). Often, these assets are purchased with virtual currency.

An NFT contains a unique identifying code and is linked to a certificate of authentication. Ownership of the NFT can be verified by the digital ledger, or blockchain, where that certificate/unique code is recorded. The actual value of the non-fungible token is found in the underlying asset and the “token” itself represents ownership. A common comparison is a car and the car’s title (the token would be similar to the car’s title, where the underlying asset is similar to the car itself).

The unique ownership code is what makes NFTs different from virtual currency, such as bitcoin or Ethereum. Each type of cryptocurrency is fungible, meaning that the value of one unit of bitcoin is always equal to any other unit of bitcoin (although the IRS has held that different types of virtual currency are not of a “like kind”). The digital code linked to the NFT makes the NFT different from all other NFTs.