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Non-fungible tokens (NFTs) have taken the world by storm. Wondering what a NFT is? To put it simply, an NFT is a unique digital token that cannot be replicated – some of which have sold for seven and even eight figures.
So is the NFT craze a bubble, like Beanie Babies and baseball cards in the ’90s? Or is it the emergence of a new form of investing? Let’s find out what the experts have to say.
How to Buy an NFT
If you’re already familiar with buying cryptocurrency, then you may think NFTs are a similar proposition. In reality, an NFT is more like a collectible item than a type of cryptocurrency.
Each NFT is unique. If you have a piece of digital art with an NFT, that token is something only you have. NFTs are sold for either a fixed price or in an auction setting where you bid against other buyers, generally paying with some form of established cryptocurrency.
There are many sites that sell NFTs, and they all have different requirements on the kind of cryptocurrency you need to purchase from their site. If a site requires Ethereum, then you must have enough Ethereum to purchase the NFT.
You can buy an NFT from one of the following sites:
What to Know Before You Buy an NFT
Tax Consequences
Because you have to sell cryptocurrency to purchase an NFT, buying an NFT can trigger a taxable event. This means you may have to pay capital gains taxes when buying an NFT. The tax charged depends on how long you’ve owned the cryptocurrency and whether or not you made a profit. If you lost money on the cryptocurrency, then you won’t owe taxes.
If you made a profit and owned the cryptocurrency for less than a year, you’ll pay short-term capital gains taxes ranging from 10% to 37%. The exact amount depends on your current tax bracket. The higher your tax bracket, the higher the percentage of capital gains taxes.
If you owned the cryptocurrency for more than one year, you’ll pay long-term capital gains taxes, which are 0%, 15% or 20%. These percentages also correspond to your tax bracket.
If you ever sell your NFT, then you’ll also have to pay taxes if you made a profit. The exact rates have yet to be determined by the IRS, but may be higher than what you would pay when selling cryptocurrency.
Avoid Scams
There are countless stories about investors being scammed by NFTs – and they’re not happening just to gullible first-timers. Before buying an NFT, financial educator Kara Perez of Bravely Go advises consumers to find as much information as possible and vet the artist. Check out their social media profiles and see if they’re using real pictures of themselves. If there’s not much information, you may want to steer clear.
“There’s just so many ways to have information stolen, there’s so little recourse for those thefts, and ultimately, you can screenshot an NFT,” Perez said. “NFTs are very much still the wild west of the finance world and research is super important before you buy anything.”
Do it for Other Reasons
One of the reasons that people buy NFTs is to support an artist they like. If there’s an artist or a cause you care about, consider buying an NFT as a type of donation. If you look at NFTs from that perspective, you’ll be less disappointed if they end up not making any money.
Treat It as a Collectible Item
Many people that buy NFTs don’t consider them investments. Instead, they think about it the same way they would a trading card, an expensive bottle of wine or a vintage couture dress. It’s an important item that they enjoy owning.
Personal finance blogger Jim Wang of Wallet Hacks only buys two types of NFTs: the NBA Top Shot and the NFL All Day. Both types of NFTs show game highlights.
“I’m bullish because both are associated with the respective leagues, so I know they’re legitimate,” he said. “I understand the demand and interest around sports cards.”
Are NFTs a Safe Investment?
When financial experts talk about investing in the stock market, they acknowledge the fact that your portfolio could lose value at any point. That’s just what the market does sometimes. But because the stock market has been around for more than 200 years, experts can also assure clients that the market will always rebound.
Unfortunately, this isn’t the case with NFTs. While a relatively short history makes the NFT market exciting, it also makes this a more speculative – and therefore more risky – type of investing.
How to Handle NFTs in Your Portfolio
Because NFTs are still such a new type of investment, most financial experts recommend not putting in more money than you can afford to lose. If losing the purchase price of an NFT would cause you to stress out or put you in a precarious financial position, it’s probably not a good idea.
Yes, you may miss out on buying an NFT that sells for millions of dollars, but that kind of success story is as rare as winning the lottery.
“I see it more like the internet stocks in the 2000s,” said Thomas Kopelman, co-founder and Financial Planner at AllStreet Wealth. “Some may end up holding value, but 99% of NFTs will be worthless.”
Once you buy an NFT, don’t count that amount as part of your overall retirement portfolio. This way, if you lose money, your long-term goals won’t be completely screwed.
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Zina Kumok (164 Posts)
Zina Kumok is a freelance writer specializing in personal finance. A former reporter, she has covered murder trials, the Final Four and everything in between. She has been featured in Lifehacker, DailyWorth and Time. Read about how she paid off $28,000 worth of student loans in three years at Conscious Coins.