So you want to buy an NFT - here's what to look out for:

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Non-fungible tokens (NFTs) have taken the world by storm. Wondering what an NFT is? Simply put, an NFT is a unique digital token that cannot be replicated – some of which are sold for seven or even eight digits.

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 see what the experts have to say.

Buy an NFT

If you are already familiar with buying cryptocurrency, you may think that NFTs are a similar proposition. In reality, an NFT is more of a collectible 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 a fixed price or in an auction environment 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 for the type of cryptocurrency you should buy on their site. If a site requires Ethereum, you must have enough Ethereum to buy the NFT.

You can buy an NFT at one of the following sites:

What you need to know before buying an NFT

Tax Consequences

Because you have to sell cryptocurrency to buy an NFT, buying an NFT can create a taxable event. This means that you may have to pay capital gains tax when buying an NFT. The tax charged depends on how long you have owned the cryptocurrency and whether or not you have made a profit. If you have lost money to the cryptocurrency, you will not owe any tax.

If you have made a profit and have owned the cryptocurrency for less than a year, you will pay short-term capital gains tax ranging from 10% to 37%. The exact amount will depend on your current tax bracket. The higher your tax bracket, the higher the capital gains tax rate.

If you owned the cryptocurrency for more than a year, you will pay long-term capital gains tax, which is 0%, 15% or 20%. These percentages also correspond to your tax bracket.

If you ever sell your NFT, you will also have to pay taxes if you make a profit. The exact rates are yet to be determined by the IRS, but could be higher than what you would pay when selling cryptocurrency.

Avoid scams

There are countless stories of investors being scammed by NFTs – and they don’t just happen to gullible novices. Before buying an NFT, financial educator Kara Perez of Bravely Go advises consumers to seek out as much information as possible and research the artist. Check out their social media profiles and see if they use real photos of themselves. If there is not much information, it is better to distance yourself.

“There are just so many ways to get information stolen, there’s so little recourse for those thefts, and eventually you can take an NFT screenshot,” Perez said. “NFTs are still the wild west of finance and research is super important before you buy.”

Do it for other reasons

One of the reasons people buy NFTs is to support an artist they like. If there is an artist or cause that you care about, consider purchasing an NFT as a kind of donation. If you look at NFTs from that perspective, you’ll be less disappointed if they don’t end up making money.

Treat it like a collectible

Many people who buy NFTs don’t think of them as investments. Instead, they think of it the same way as a trading card, an expensive bottle of wine, or a vintage couture dress. It is an important item that they love to own.

Personal finance blogger Jim Wang of Wallet Hacks buys only two types of NFTs: the NBA Top Shot and the NFL All Day. Both types of NFTs show game highlights.

“I’m optimistic because both are associated with the respective leagues, so I know they’re legit,” 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 recognize the fact that your portfolio can lose value at any time. That’s exactly what the market sometimes does. But because the stock market has been around for more than 200 years, experts can also assure clients that the market will always recover.

Unfortunately, this is not the case with NFTs. While a relatively short history makes the NFT market exciting, it also makes it a more speculative – and therefore riskier – type of investment.

How to deal with NFTs in your portfolio

Since NFTs are still such a new type of investment, most financial experts recommend that you don’t put in more money than you can afford to lose. Losing the purchase price of an NFT stresses you out or puts you in a precarious financial position, it probably isn’t a good idea.

Yes, you may miss an NFT that sells for millions of dollars, but such a 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 eventually hold value, but 99% of NFTs will be worthless.”

Once you buy an NFT, you don’t count that amount as part of your total pension portfolio. This way, if you lose money, your long-term goals will not be completely ruined.

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Zina Kumok (165 posts)

Zina Kumok is a freelance writer specializing in personal finance. As a former reporter, she has covered murder trials, the Final Four, and everything in between. She was featured in Lifehacker, DailyWorth and Time. Learn how she paid off $28,000 in student loans over three years at Conscious Coins.