NFT, Non Fungible Token - Definition, Why NFTs are Valuable, Uses and Features of NFTs

Updated on: Jun 9th, 2023


10 min read

Non-Fungible tokens are cryptographic tokens representing the ownership of digitally scarce goods such as art, collectables, or even real estate.

Let us understand the meaning of non-fungible before diving into the understanding of Non-fungible Tokens (NFTs).

Latest updates Clarification on proposed Section 115BBH in Budget 2022

1. Losses incurred from one virtual digital currency cannot be set off against income from another digital currency. 
2. Infrastructure cost incurred on mining crypto assets will not be treated as the cost of acquisition. 

Union Budget 2022 Outcome: 

1. Income from the transfer of virtual digital assets such as crypto, and NFTs will be taxed at 30%.
2. No deduction, except the cost of acquisition, will be allowed while reporting income from the transfer of digital assets.
3. Loss from digital assets cannot be set off against any other income.
4. Gifting of digital assets will attract tax in the hands of the receiver. Losses incurred from one virtual digital currency cannot be set off against income from another digital currency.

What do you mean by non-fungible?

Non-fungible means something which is unique and cannot be exchanged for anything else.

Fungibility is a characteristic of a good or a commodity where each unit is interchangeable and indistinguishable from another. Fungible items can be exchanged because what defines them is their value itself and not any unique set of properties.  

For example, if you have a currency note of Rs.100, you can easily replace it with another currency note of Rs.100 or two notes of Rs.50 without affecting the value exchanged. For instance, Bitcoin is also fungible, meaning you can exchange one Bitcoin for another.

In contrast, your favourite limited edition football player’s card is an example of a non-fungible commodity. Each card is unique and can be treated as collectable. A card with one player doesn’t usually have the same value as the card with another player. Even with two same cards, other factors such as the year of production or preservation of the card can make a difference. Also, a piece of art or a painting created as one unique copy is an example of non-fungible.  

NFTs are part of a new digital investment craze that has exploded over the past year. What makes these assets that are sold solely on the internet so valuable?

What makes NFTs so valuable?

Blockchain technology allows NFTs to be publicly authenticated, serving as a digital signature certifying ownership and originality. NFTs cannot be exchanged on a like-for-like basis as each one is unique in contrast to fungible assets like dollars, stocks or bars of gold. 

NFTs can have only one legal owner and are secured by the Ethereum Blockchain, i.e. ownership records cannot be modified. 

An art collector, Pablo Rodriguez Fraile, bought a 10 seconds video clip by an artist for $67,000  (approx. Rs.50 lakh) and sold it for $6.6 million (approx. Rs.48 crore). Founder of Twitter, Jack Dorsey, sold his first-ever tweet from 15 years ago through NFT. 

NFTs can be various digital forms like drawings, music, a game, any art, etc. NFTs can be digital artwork and sports cards, also pieces of land and virtual environments. 

However, currently, the popularity of these tokens have gained to sell digital art using blockchain technology. You can copy the digital file as many times as you want, including the digital art, through Non-fungible Tokens. However, NFT’s are mainly designed to give the ownership of such digital art, whereas the artist can retain the copyright with himself but sell its ownership.  

Every NFT is like a unique token on the blockchain network. NFT could be one unique piece without copies, whereas it could also be a trading card with hundreds of copies of the same artwork. 

As mentioned above, NFTs can have only one owner. This ownership is managed using a unique ID and metadata that is unique to a particular NFT. NFTs are executed through smart contracts, which assign ownership and transferability of the tokens. 

The creator of the NFT can decide the scarcity of the asset. For example, consider a ticket to a concert. The creator of the NFT can choose how many tickets will exist. Sometimes the tickets could be precisely similar, just having a ‘general admission’ permit. At the same time, they can be slightly different, like having seat numbers assigned to each ticket. 

Most of the NFTs are a part of the Ethereum blockchain. Ethereum is one of the types of cryptocurrency, but its blockchain also supports Non-fungible Tokens, which store extra information and work differently. Other blockchains networks can also implement their versions of such tokens. 

How is an NFT different from cryptocurrency?

Infusible Token is referred to as NFT. Although it is typically developed using the same type of programming as cryptocurrencies like Bitcoin or Ethereum, the similarities end there.

Both conventional currency and cryptocurrencies are "fungible," or capable of being traded or converted into one another. A dollar is always worth another dollar, and the value of one Bitcoin is always equivalent to the value of another Bitcoin. Due to its fungibility, cryptocurrency is a reliable method for blockchain transactions.

NFTs are unique. NFTs are non-fungible since they cannot be exchanged for or equal to one another due to the digital signatures on each one. For instance, two NBA Top Shot videos are not equivalent to one another.

How are NFTs useful presently?

If you are an artist, then NFT will give you the medium to sell your artwork. Non-fungible tokens have a feature that pays you every time it is sold further. 

Whereas if you are a buyer of the NFT, you are an art lover and want to support the artist by buying their creation. Buying NFT gives you the ownership right, like you will use the picture to post the image online or use it as your profile picture. 

Also, if you are an art collector, collectors buy the art with the motive that its value might go up one day, and you can sell it further in the market for handsome gains. 

Common Features of NFTs are as below: 

  • Unique – Each NFT has a unique property usually stored in tokens metadata. NFTs are unique in their character, and no two NFTs are the same. On the contrary, an original image .jpg file is the same as its copy, a .jpg file. 
  • Digitally Scarce resource – NFT is stored in the blockchain network. Hence, the certificate of ownership is available on multiple networks, making it possible to prove digital assets’ ownership. 
  • Indivisible – Most NFTs cannot be split into smaller denominations; you cannot buy or transfer a fraction of NFTs. 
  • Ownership– These tokens guarantee the ownership of the asset transferred.
  • Fraud proof– They are easily transferable and fraud-proof.

Non-fungible tokens could represent 

  • Digital arts like GIFs (graphics), collectables, music, and videos.
  • Real-world commodities like purchase-sale deeds of a house property, car deeds, tickets to concerts, legal documents, signatures etc. 

NFTs can solve the issues that exist as more and more things are getting digitised. As everything is now possible on the internet, NFTs make it possible to create scarcity and offer uniqueness and ownership proofs to goods and commodities. 

Some people consider NFTs the future of fine art collecting, whereas some treat them as ‘Pokemon Cards’. We also see big art creation brands like Marvel and Wayne Gretzky launching their tokens. However, the edge that these tokens offer to artists/creators and how it impacts the behaviour of people all around the globe remains to be seen.

How to buy NFTs?

NFTs are unique. Everybody is digitally signed. If you're eager to begin your own NFT collection, you'll need to purchase the following essentials:

You must first purchase a digital wallet that enables you to store cryptocurrencies and NFTs. Depending on the currencies your NFT provider allows, you'll probably need to buy some cryptocurrency, such as Ether. Now, you can purchase cryptocurrency with a credit card on several websites. After that, you'll be able to transfer it from the exchange to your preferred wallet.

You’ll want to keep fees in mind as you research options. Most exchanges charge at least a percentage of your transaction when you buy crypto.

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Quick Summary

Non-Fungible Tokens (NFTs) represent ownership of unique digital goods like art and are distinguished from fungible assets like cryptocurrency. Union Budget 2022 outlines tax implications for virtual assets. NFTs, managed by blockchain, certify originality and ownership. NFTs can be digital art, music, collectibles, or real-world assets. Unlike cryptocurrencies, NFTs are not interchangeable due to their uniqueness and value certification. Artists, collectors, and investors engage with NFTs for various purposes.

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