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NFT Meaning: What is a Non-Fungible Token?

Two years after NBA Top Shot took the sports world by storm, NFTs continue to be a topic of conversation—though the tone of that conversation has changed numerous times in the interim. Are NFTs the future of sports cards and ticketing? Will they be at the center of 21st century fandom? Or are they a fad—or worse, a scam?

No matter what, they don’t seem to be going away, even if crypto companies like FTX implode. Existing players like Ticketmaster and DraftKings have launched their own NFT projects, to say nothing of the many stars—Patrick Mahomes, Tom Brady, Stephen Curry, etc.—who have at one time backed the technology.

NFTs, or non-fungible tokens, share some similarities with cryptocurrencies like Bitcoin. But whereas a bitcoin is like a dollar bill—insofar as each one is worth as much as every other (making them fungible)—NFTs are individually unique. If an artist uploaded the same image twice onto the blockchain—the decentralized (and therefore unalterable) online ledger that tracks and verifies transactions in the cryptocurrency world—the two images would be distinct NFTs. So one of those identical-looking NFTs could be worth more than the other by virtue of, for example, the order in which they were produced.

Most often built on the Ethereum blockchain, NFTs often serve as digital certificates of ownership, though they can also have digital assets, like images or music, attached. Theoretically, an NFT could even represent a land deed or any singular item. At first, the most popular applications of the tech have come in the world of digital art and collectibles. Sometimes the online tokens also unlock real-world tangible products, like custom basketballs or concert tickets.

Dapper Labs, a Vancouver-based startup valued at more than $7.5 billion in 2021 after developing innovative NFT products, showed NFTs’ potential by making highlight clips collectable and tradeable. Many pro sports leagues have since supported similar programs, including additional Dapper Labs platforms for NFL, UFC and soccer highlights.

A second trend has developed that uses NFTs for new forms of fantasy sports competition. Both Sorare and DraftKings built games in which players collect NFT cards of players and create lineups of their own to enter into competitions, with winners based on those players’ real world performances.

Some properties are also experimenting with using NFTs as tickets to events. In theory, this could give teams a better sense of who is actually using their tickets (and also allow the team to earn a royalty fee from secondary market sales). A more common use at this point, though, is giving commemorative NFTs in addition to more traditional tickets.

Based on the digital contract language, some NFTs convey more rights than others. “Owners” of highlights on NBA Top Shot, for instance, don’t have the legal right to reproduce or profit off of the clips in the collection. They only own the specific Top Shot collectible, referred to as a “moment.” Each moment comes with a unique serial number, and the blockchain it’s built on (or “minted,” in crypto-speak) ensures its authenticity.

Much like on the NBA points leaderboard, LeBron James has grabbed the top spot on Top Shot’s all-time sales list, with a single NFT depicting a dunk from the 2020 NBA Finals selling for more than $230,000 in 2021. In fact, the top four sales on the platform all feature The King.

Soccer stars on Sorare have him beat, though. In February 2022, an NFT card attached to Norwegian superstar Erling Haaland, who currently plays for Manchester City, netted more than $600,000. Other NFTs, especially pieces from the much-ballyhooed CryptoPunks collection, have fetched over $1 million.

NFT sales dropped precipitously in the summer of 2022, with the Ethereum network going from hosting $3 billion in transactions that May to barely $500 million in July. What became known as crypto winter was further triggered by FTX’s collapse in November 2022, weakening confidence in crypto brands across the industry.

Sports projects were among those affected, with Steph Curry’s collection entering a period of “deep freeze.” According to CryptoSlam! data, Top Shot hosted about $3 million in sales this February, compared to $48 million in February of 2022 and $224 million in February ‘21.

Still, there have been signs of life, with the total Ethereum market surpassing $1 billion in total volume in February for the first time since “winter” set in.

Despite being new and risky, crypto companies have made a compelling offer to sports properties. First, there’s the money—startups including Dapper Labs, Sorare and Autograph raised millions of dollars amid the hype, and are now looking to spend that capital.

But the product’s potential is compelling, too. Sports execs varyingly see NFTs as a new line of merchandising business as well as an opportunity to find and reward loyal followers.

Media companies see the same opportunity, with Warner Bros. Discovery Sports often being on the cutting edge.

Both lawyers and legislators are still sorting out how blockchain products should be controlled and regulated. In New Jersey, lawmakers are considering a bill that would require a license to engage in digital assets businesses. Lobbyists representing Dapper Labs and Sorare have asked for exemptions from the potential rules.

Meanwhile, Dapper Labs is facing a lawsuit arguing that it breached security laws.

While collectibles, including NFTs, are increasingly thought of as investments, they often come with unenviable tax burdens. The long-term tax rate on collectibles—those held one year or more—is 28%, not the lower rates enjoyed by stocks, bonds, real estate or other traditional assets, according to The Tax Adviser, a CPA-focused publication. Those old-school investments are taxed at long-term rates of 20%, 15% or nothing at all (depending on your income tier).

Another reason for finding a good accountant: It’s not clear if the Internal Revenue Service would consider an NFT an investment or a collectible held for personal enjoyment. That has implications for whether you can offset NFT sale gains on your taxes or even if you can deduct any future loss of value. There are further complexities if the collectible is held in a business partnership or a trust, which could trigger capital gains if one’s stake in the partnership is sold, even if the NFT it possesses isn’t. And if the NFT also comes with some sort of right to a physical object, taxation will be complicated once again, according to ZenLedger, a cryptocurrency tax software provider. Don’t get us started on the implications of an NFT being sold as part of a fundraiser, like Mahomes’ were.

The complexities don’t stop there. Popular NFT platforms, such as Rarible, conduct transactions in cryptocurrency only. Unless you convert a fiat currency (like a dollar) to crypto and then are able to buy an NFT without the value of your crypto shifting much, you’re OK. But if when you buy the NFT, your crypto is worth more than what you paid for it, you’ve created a taxable event. That is, you’ve recognized a gain on your cryptocurrency by trading it for an NFT, according to Shehan Chandrasekera, the head of tax strategy at Cointracker, a crypto site.

Businesses creating and selling NFTs—or holding them, for whatever reason—aren’t addressed specifically by accounting rules (in the U.S. at least), and so they need to be reconciled with existing regulations, according to a Deloitte report. That means crypto for a business—whether a currency or an NFT—doesn’t count as cash, a financial instrument or even inventory. “It is not possible for the company’s accounting function to reflect the economics of how it may value its digital assets,” the accounting firm noted. For a business involved in NFTs, generally speaking, transactions will be considered barter. Like normal sales for cash, barter transactions need to be reported to the IRS and will affect everything from total tax liability to employment taxes.

Lastly, because NFTs are unique, it’s easier for the IRS to track sales and identify tax cheats using the same methods they deploy today for cryptocurrencies.

Following the crypto collectible boom in 2021 and early 2022, leagues and developers are now looking at how the technology could be applied to video games and more advanced fantasy competition. The NFLPA has given licenses to two blockchain-empowered games that allow players to collect and utilize in-game NFTs. DraftKings is continuing to expand its NFT-based ReignMakers franchise, with a PGA Tour game due soon.

On the team side, many franchises are now looking at how free NFTs could help them connect with fans more directly.

(This story was originally published on March 24, 2021, and has since been updated with current information.)

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