Non-Fungible Tokens: A 2021 Beginner’s Guide

Non-fungible tokens (NFTs) are some of the latest innovations in the crypto market bolstered by the Ethereum chain. NFTs are often a hot topic in the crypto/DeFi sector, but they offer many real use cases in collectibles, royalties, music, gaming.

Let’s find out more about non-fungible tokens, where to trade, the projects changing the landscape, artists to follow, and how to handle crypto art taxes.

What are non-fungible tokens?

Non-fungible tokens are unique cryptographic tokens recorded in smart contracts under the Ethereum blockchain, meaning it is possible to verify its uniqueness in a world full of counterfeit objects.

NFTs are the opposite of Bitcoin, in which one of the key features is its fungibility, meaning each Bitcoin is equal to the next. Each Bitcoin has the same value, property, and recognition between parties.

NFT’s non-fungibility is the key feature that differentiates these tokens from the other crypto assets.

How to create NFTs?

You can issue NFTs under the Ethereum blockchain as ERC-721 tokens. These are different from ERC-20 tokens (e.g., TRON, EOS, VEchain, ICON) that Ethereum allows to launch as regular fungible tokens.

The meaning of non-fungible tokens

In artistic fields, the meaning behind each piece, the emotions the artist wants to transmit, and its unique interpretation, even in digital form, offer the unique value proposition of NFTs.

NFTs guarantee the source of each art piece. On one side, it gives security and proof-of-work to the artists.

On another side, in a trustful and open market, its participants need to recognize and attribute the art piece to its real creator, establishing one of the principal needs in the art market: traceability.

For example, Picasso’s painting is only as valuable as we can fully attribute it to Picasso. That reliable proof makes all the difference in the perceived and real value of the piece.

Why are non-fungible tokens valuable?

The art market and its intricacies around the setting of a particular price for a piece remains somewhat mysterious to most people.

The appreciation of art and its merits is always dependent on the observer. The same challenge presents itself to NFT. As Bitcoin is the reserve currency of the internet, and Ethereum the internet of money, we can say NFTs are the internet of art.

As a digitally native generation emerges in all sectors, art follows their imagination, worries, and accomplishments. NFT’s value is intrinsically linked to each piece as in traditional art but also given its underlying technology.

Applying Blockchain to art and other sectors breaks a long history of uncertainty and fraud in the collectible market, music, royalty rights across industries, sports, etc.

Famous examples of non-fungible tokens

CryptoPunks gave the starting point to the new era of digital characters that are traceable using the Ethereum Blockchain. Since its launch, it has generated more than $49M in total sales value.

CryptoKitties is the most notorious project to come along after CryptoPunks, directly benefiting from the introduction of ERC721. Think of it as a blockchain-powered Tamagotchi-like game. The game revolves around breeding digital cats and trading them with players with full ownership of each collectible.

After those first iterations, NFTs came in full force in 2020, extending to collectibles, gaming, art, and music.

In October 2020, Christie’s in New York, auctioned its first blockchain-based piece: Block 21 by artist Robert Alice for a record price of $131,250. The original price estimate was between $12K and $18K, while the actual selling price reflected the great enthusiasm about digital art.

As we enter 2021, the NFT market is only at its beginning stage. In February, an art piece called Hashmasks sold for about $650K worth of ETH.

Top digital artists to follow

Fortunately, the digital art space is full of talent. We want to highlight in this list some of the artists paving the way. If you want to discover more crypto experts, check our list of the best 100 crypto twitter accounts to follow.

Trevor Jones – @trevorjonesart (15K+ followers)

Trevor is one of the most notable NFT artists while being mostly known as the creator of the famous Picasso’s bull. You can check more of his work here.

The #Bitcoin Bull is on the move again but will it hit $20,000 before the end of the year – Yes or No? pic.twitter.com/2tpbFgjEVW
— Trevor Jones 🎨 (@trevorjonesart)
November 29, 2020

Josie – @josiebellini (9K+ followers)

Josie is a pioneer digital artist working on the intersection of crypto, augmented reality, and painting. Expect innovative content around crypto, art, and NFTs across various platforms. You can also find Josie’s work at the top crypto conferences and exhibitions.

“Software is eating the world” – @pmarca

Just how #Tesla sends software updates to their cars, I am now sending updates to my physical art pieces.

Come check it out live a @coindesk #Consensus2019 pic.twitter.com/XoJYQXjrEt
— josie (@josiebellini)
May 12, 2019

Matt Kane – @MattKaneArtist (3K+ followers)

Matt is a celebrated digital artist exploring the intersection of code interacting with art principles. Check more of his awarded art here.

It’s an honor to accept this award for innovation in #NFTs on behalf of myself, @TokenAngels & @AsyncArt. I wish to also share this w/ pioneers like @matthall2000, @pents90, & @dete73; all who laid frameworks for inspiring us, inventing at a time before awards or recognition.🙏 https://t.co/z8Ppem18pT
— ᴍᴀᴛᴛ ᴋᴀɴᴇ 🎨 (@MattKaneArtist)
December 9, 2020

Hackatao – @Hackatao (8.4K+ followers)

Hackatao is a duo of digital artists from Milan. They recently launched the “Queen of Crypto” piece that generated a lot of interest online. Check their art pieces.

👑👑QUEENS👑👑
They alone can win the game.

Feb 2, 7pm ET on @niftygateway
#NFTs #cryptoart pic.twitter.com/jAYYbx9YId
— Hackatao (@Hackatao)
February 1, 2021

Pranksy – @pranksyNFT (9.5K+ followers)

Pranksy is a co-founder of the popular NFT subscription box service, NFTBoxes. He is also a producer and creator of NFTs.

We did it! @nba_topshot #nftsonthescreen #nfts

🥰 pic.twitter.com/PPoyIvUBlw
— Pranksy 📦 (@pranksyNFT)
January 26, 2021

U.Dresemann – @buzz_lightning (2.2K+ followers)

Buzz lightning works in the intersection of human versus machine, reality and the virtual world. Find more on his art on SuperRare.

I’m working on a new @AsyncArt piece “Michael’s & Angelo’s Dungeon” #ProgrammableArt #cryptoart #blockchain pic.twitter.com/rmIaMl2kL9
— U.Dresemann ⚡️ (@buzz_lightning)
August 20, 2020

Spaced Painter – @SpacedPainter (6.9K+ followers)

Spaced painter has next-level artwork mixing cinematic effects and VR into his art pieces. Check out his work here.

Welcome new followers🙏I’m a Visionary Cryptoartist 🖤Cinematic Immersive VRNFTs:
🔥https://t.co/ORRV0NQQXw
🔥https://t.co/MdN0KBRBSC

🔥3DFractalArt https://t.co/finifQMoeV

🔥Interview https://t.co/TTUW1H9pH3

🔥SalesRecords https://t.co/16CSiXjc1p#niftygateway drop SOON😎 pic.twitter.com/9vUGNvkREC
— Spaced Painter (@SpacedPainter)
January 27, 2021

GISELXFLOREZ – @GiselFlorez (3.5K+ followers)

Gisel is a digital artist using still and cinematics methods in her art pieces while dwelling into VR. Check out her artwork here.

Travel with me in light. https://t.co/r8BtZJxyZ1 @SuperRare_co pic.twitter.com/ExOixjmtHY
— GISELXFLOREZ | GISELX.eth (@GiselFlorez)
September 11, 2020

Sarah Zucker – @thesarahshow (3.4K+ followers)

Sarah is an artist based in LA mixing the “gorgeous and grotesque”, and old and new technologies. Find more of her work here.

Wow… I hit 6 BILLION views of my GIFs on @giphy today. That is… a lot of views.

And now, thanks to #cryptoart, I’m actually supporting myself with my art. 😎 pic.twitter.com/9sxkyrtwxE
— Sarah Zucker (@thesarahshow)
October 18, 2020

Coldie – @Coldie (7K+ followers)

Coldie is a notable digital artist with a variety of work. We want to highlight his collection of blockchain personalities. Follow him on Twitter for reflection on crypto art and the podcast with Josie, showcasing the faces “behind the art.”

2 years in #Cryptoart = 20 years in traditional art
— Coldie (@Coldie)
October 1, 2020

XCOPY – @XCOPYART (5.7K+ followers)

Xcopy is a digital artist based in London exploring humanity with flashy style in his pieces. You can find his work across marketplaces and a lot of artwork from other artists on his Twitter.

How to become an artist

1. Decide you’re an artist

Congrats you made it!🔥
— XCOPY 🏴 (@XCOPYART)
September 12, 2020

JOY – @JohnOrionYoung (2.6K+ followers)

Joy makes happy, fun, and joyful digital art, using VR/AR in his art pieces. Find a great display of his work on Twitter and Opensea.

Thanks so much everyone for playing with the JOYtoy Machine in beta!!! 744 JOYtoys have been created just through Etherscan 🤯https://t.co/YcbN3xtFUn

Even more fun JOYtoy Shop experience coming soon! 🤠#JOYtoys #CryptoArt #ArtOnChain pic.twitter.com/XqDAU84Kzn
— JOY (@JohnOrionYoung)
January 5, 2021

Tweety – @Arazi61808737 (870 followers)

Tweety is a crypto kitty breeder from the UK. On Twitter, expect a lot of showcases from other artists. More art pieces here.

My amazing Avastar #196 painting by the fantastic Katy Arrington, enjoy!@AvaStarsNFT @KnownOrigin_io @SuperRare_co @katyarrington @opensea pic.twitter.com/UxpUYFdo0i
— Tweety (@Arazi61808737)
March 22, 2020

Pascal Boyart – @pascalboyart (6.4K+ followers)

Pascal is a painter from Paris using NFT to develop frescoes and murals inspired by traditional art. Check out his work.

It’s finally here! 🥳

The Underground Sistine Chapel is the fruit of 5 months of work 🏋🏽‍♂️

This modern version of #MichelAngelo‘s masterpiece in a former gold foundry on the outskirts of Paris is my biggest project to date!

Photo 📷 by Stefano Rellandini

More bellow ⬇️ pic.twitter.com/C8EMxsoafO
— Pascal Boyart (@pascalboyart)
December 11, 2020

Blake Kathryn – @blakekathryn (34K+ followers)

Blake is a notable LA-based digital artist working with bright illustration, 2D, and 3D. She has her work exposed on major exhibitions and highlighted across media outlets. Follow her beautiful work here.

waiting to be hired for kpop mv’s: pic.twitter.com/BzuOwDe6Jn
— balake (@blakekathryn)
September 7, 2020

FEWOCiOUS – @fewocious (24K+ followers)

Victor is a young but highly recognized artist. You can check his electric paintings and dwellings into NFTs here. You can also hear his thoughts on art on his podcast.

“Over-Analyzing Again”

SOLD for $35,000

1/1 to @etyoung

on @niftygateway pic.twitter.com/ogYBcnIva5
— FEWOCiOUS (@fewocious)
January 2, 2021

How do I buy non-fungible tokens?

There are a variety of ways to buy, store, trade, and earn NFTs. We’re exploring the most liquid and largest marketplaces that cover a wide range of products, (collectibles, digital art, etc).

OpenSea

OpenSea is the most notorious marketplace for NFT, but it also offers users the chance to trade many other digital goods (e.g., collectibles, gaming items, domain names, digital art).

SuperRare

SuperRare is a marketplace targeted for digital artists and creators to showcase their art.

Rarible

Rarible allows you to store, create and sell your digital art. You can find digital art, games, domains, or metaverses in their marketplace. Rarible’s native token ($RARI) is earned by users who are active on the platform. Rarible has less liquidity than the other options but its sleek design and usability makes it easier to create and sell your art or buy it from your favourite creators.

KnownOrigin

KnownOrigin is a digital art gallery/ marketplace. You can buy digital art from various creators while also learning more about who’s behind the pieces from KnownOrigin’s gallery displays and journals.

Nifty Gateway

Nifty Gateway is a NFT marketplace developed by one of the leading crypto exchanges in the US, Gemini. It’s a premium marketplace where you can buy, sell and showcase your NFTs.

Decentraland

With Decentraland, users can buy a piece of this unique digital world and create new applications on it, while having the chance to monetize all the digital assets they created.

Wax Marketplace

Wax is a Blockchain but also offers an exchange where you can trade digital goods. You can buy, sell, trade or gift digital items after acquiring its native token – WAX – to conduct trades in. You can find NFTs and in-game collectibles in their marketplace.

Autctionity

Auctionity is a blockchain-powered auction house offering a variety of NFTs. You can buy, sell, open your auction house to conduct digital art gallery, and earn community rewards.

Enjin

Enjin marketplace was one of the first to go live, giving people the chance to buy and sell various kinds of blockchain-based assets (gaming and collectibles). They have recently done a major update to the marketplace design and functionalities.

MakersPlace

MakersPlace is a premium destination for those wanting to showcase their unique and authentic digital pieces and also to collect and invest.

You can find many other marketplaces focused on digital gaming at Axie Marketplace or Sorare. For data on more marketplaces, volume, liquidity, or number of transactions, take a look at Nonfungibe or Dappradar.

How to store non-fungible tokens?

Some of the marketplaces we highlighted offer a decentralized option and a safer option to store your NFTs. However, for security reasons, you may want to spread your holdings across other wallet providers.

Metamask

Metamask is an increasingly popular wallet for users who want to dive into the DeFi world. As a result, some of their new functionalities allow you not only to store but easily transfer NFTs from their wallet. Its simplicity in connecting to most marketplaces and ease of use makes it a solid choice for any NFT enthusiast.

Trust Wallet

Trust Wallet offers a crypto-collectibles wallet ready to safely store your ERC721 and ERC1155 tokens. Its beautifully designed and simple interface, where you can see your NFT, makes it an attractive choice to store your non-fungible tokens.

Sign-up to CoinTracking today!

Do you pay taxes on NFT trades?

In the US, the tax rule that applies to art and crypto is pretty much the same. Art is considered a property, and crypto is also property by the IRS.

As a result, you need to recognize income for sales proceeds from the sale of your non-fungible tokens as every crypto-to-crypto trade is a taxable event in the US.

You need to calculate gain/loss based on the difference between your sales proceeds and your cost basis, as well as your holding period for the property you sold. In other words, you should treat the NFT sales as a trade when you invest in it.

If you’re a creator of NFTs with the purpose of selling it for profit, most likely you will need to treat it as a sale of inventory. All the sales proceeds will be treated as ordinary income, as no basis is allowed for self created art. You may be able to deduct expenses in creating/selling the art as a business expense and use it to offset your income.

As this topic is still very recent, we strongly advise that you search for professional help catered to your unique situation as creator/investor.

If you need personalized help reviewing your transactions or preparing your US tax returns, check out our CoinTracking Full Service, provided by a team of crypto tax professionals led by Sharon Yip, the export CPA who helped us put together these insights.

Learn how to import your non-fungible tokens transactions into your CoinTracking account:

CoinTracking also helps you with:

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If you need personalized help reviewing your transactions or preparing your US tax returns, check out our CoinTracking Full Service, provided by a team of crypto tax professionals led by Sharon Yip, the export CPA who helped us put together these insights.

Disclaimer: All the information provided above is for informational purposes only and should not be considered as professional investment, legal, or tax advice. You should conduct your own research or consult with a professional financial advisor when investing.