Is Non Fungible Token that is popularly known as NFT, a unique digital item?

Is Non Fungible Token that is popularly known as NFT, a unique digital item?

The cryptocurrency space is witnessing the sort of mania seen in the stock markets in 1999-2000 and in 2007. New offerings are being announced at regular intervals. Non Fungible Tokens or NFTs have launched in India some time ago. However, their popularity has soared now with celebrities beginning to endorse them. An NFT is a unique digital item.

Kyle Lopes, co-founder of BollyCoin, an NFT marketplace says "NFTs act as certificates of authenticity or units of information that are verifiable on a blockchain. Artists retain the copyright and reproduction rights."

WazirX NFT Marketplace, Vice President and Advisor, Visakha Singh had this to say, "The digital item can be art, audio, videos, items in video games, and other forms of creative work. NFT can be stocked by collectors. These digital assets give a unique opportunity to both investors and creators to invest in a different asset class that gains in value over time."

NFTs are unique tokens and can't be replaced by another 'identical' item. Creators can place their digital assets on auction over the blockchain-based NFT marketplace. If you are an artist, you can create a piece of art, create an NFT for it, and then sell it. Buyers can buy these creations, either as collectibles or for trading.

Bollywood artists such as Amitabh Bachchan, Salman Khan, Suniel Shetty, Sunny Leone, and singer Kailash Kher are backing NFTs. You get digital ownership (copyright). If you buy art in the real world, there's a paper that states the piece of art belongs to you. On a blockchain, unlike paper, there's no chance of forgery.

An NFT is also a liquid asset that can be traded easily. Investors betting on this asset class must understand its risks. Says Lopes: "This new asset class comes with high price volatility. People have paid exorbitant prices for NFTs. Collectors should be mindful of buying into this hype."

Think hard about whether the NFT has any intrinsic value that can grow sustainably. Social tokens India's first crypto token GARI was launched by micro-content, short-video app Chingari. More such offerings are expected to hit the market soon.

A crypto token is a virtual currency token or a denomination of a cryptocurrency. It represents a tradable asset or utility. Sumit Ghosh, CEO, and co-founder, of Chingari, explains, "Cryptocurrencies, such as Bitcoin, are the native assets of a blockchain. Tokens, on the other hand, are built on an existing blockchain using smart contracts. They can be used for investment purposes, to store value, or to make purchases."

A social crypto token allows a content creator to directly monetize his creations without using an intermediary. Content creators issue their own tokens which their fans buy. Only a limited number of tokens are issued. Rising demand pushes up their value, allowing the creator to compensate himself. The idea is akin to David Bowie issuing Bowie bonds in the nineties.

Given the nascent character of all these assets, most financial advisers currently ask their clients to stay away from them unless they are prepared to write off those funds. Those bent on investing in these assets should risk only a small part of their portfolios.

Currently, there is no clarity from the tax authorities regarding how gains from these assets should be taxed. Says Sameer Jain, managing partner, PSL Advocates & Solicitors: "What can be referred to as a safe harbor will emerge once there is clarity on the subject. For now, the advice to tax filers is that if the cryptocurrency was bought solely as an investment, any gain will be taxed under the head income from capital gains."

"But if there were frequent transactions involving substantial sums," adds Jain, "income from the sale of cryptocurrency will be taxed as business income."