A non-fungible token, or NFT, is a token on a blockchain that is unique and cannot be exchanged one-for-one with another token. This is the defining contrast with cryptocurrency such as bitcoin, where every unit is identical and interchangeable, the property called fungibility. Because each NFT is distinguishable and its ownership history is recorded publicly, NFTs are used to represent ownership of specific items: a piece of digital art, a collectible, an in-game asset, event access, or a pointer to a real-world object.
Non-Fungible Token (NFT)
A non-fungible token (NFT) is a unique, one-of-a-kind entry recorded on a blockchain that represents ownership of a specific digital or physical item, as opposed to ordinary cryptocurrency, where every unit is interchangeable.
Last reviewed by Steven Fox, CFP®, EA
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Quick Summary
- The word "fungible" means interchangeable, and a non-fungible token is the opposite, each one distinct and not a substitute for another.
- An NFT is a record of ownership on a blockchain, most often pointing to digital art, collectibles, game items, or a claim on a physical asset.
- Owning the NFT is not the same as owning the copyright or the underlying file; what you hold is the token and whatever rights its terms actually grant.
- NFTs are highly speculative and often illiquid, and many trade far below their purchase price or cannot be sold at all, in a market that is a frequent venue for fraud.
Definition
Advanced Explanation
The word fungible describes things that are mutually substitutable. One dollar is worth any other dollar, and one bitcoin can settle a debt as well as any other bitcoin. An NFT is built to be the reverse: the token carries a unique identifier, so no two are the same and the blockchain records exactly who owns which one. That uniqueness is what lets an NFT stand in for ownership of a specific item rather than a quantity of an identical asset.
A crucial and widely misunderstood point is what the buyer actually receives. In most cases the NFT is a record on the blockchain that references an item, often a file stored elsewhere, rather than the file itself. Buying an NFT of an image usually conveys ownership of the token and a claim recorded on-chain, not the copyright to the artwork and not any power to stop others from copying the same image. What rights transfer, commercial use, resale royalties, or nothing beyond bragging rights, depends entirely on the terms attached to the sale, which many buyers never read.
As an asset class, NFTs are speculative and illiquid. Prices are driven by attention, scarcity, and community rather than cash flows, and a token is only worth what the next buyer will pay, if there is one. Trading volumes for most collections collapsed after the 2021-2022 boom, leaving many NFTs with no active market. The space also attracts fraud, including wash trading to fake demand, counterfeit collections copying real artists, and rug pulls where creators promise a project and disappear with the proceeds. For federal tax purposes an NFT is property, like other digital assets, so selling one at a gain or loss is a capital transaction, and the IRS has indicated some NFTs may be treated as collectibles, which can carry a higher long-term capital gains rate.
Used in a Sentence
“Marcus paid two ether for a non-fungible token from a well-known art collection, then discovered a year later that the same collection's tokens were changing hands for a fraction of what he had spent.”
How It Works
An NFT is created, or "minted," when someone writes a new unique token into a smart contract on a blockchain, usually Ethereum. The contract records the token's identifier and its current owner. When the NFT is sold, the blockchain updates the owner field, producing a public, tamper-resistant chain of custody. NFTs are typically bought and sold on marketplaces that match buyers and sellers and take a fee.
Here is a hypothetical to show how the economics can run. Suppose an investor mints an NFT for $300 in fees and network costs, then sells it during a hot market for $2,000, a $1,700 gain that is a taxable capital transaction. A second investor buys it at $2,000 hoping to flip it higher. Interest in the collection fades, active buyers vanish, and the best standing offer drops to $150. The second investor now owns a token that cost $2,000 and can be sold for $150, a $1,850 loss, and only if a buyer appears at all. The uniqueness that makes an NFT collectible is the same feature that can leave it with no market.
Pros and Cons
Pros
- Records unique ownership and a public history for a specific item, which is genuinely useful for provenance and authenticity.
- Enables new models for digital goods, such as creators earning resale royalties coded into the token.
- Ownership is verifiable by anyone and does not depend on a central registry.
Cons
- Highly speculative and often illiquid; many NFTs cannot be resold for anything close to their purchase price, or at all.
- Owning the token rarely means owning the copyright or the underlying file, a distinction that traps buyers.
- The market is a frequent site of fraud: fakes, wash trading, and rug pulls.
- If the file the NFT points to is stored off-chain and that storage disappears, the token may reference nothing.
People Also Asked
Answers to the most frequently asked questions.
If I buy an NFT of an image, do I own the image?
Usually not in the way people assume. You own the token and the on-chain record of ownership, but the copyright to the artwork typically stays with the creator unless the sale explicitly transfers it. Others can still copy and view the same image. Read the terms attached to the sale, because they, not the token itself, determine what rights you actually get.
What makes a token "non-fungible"?
Fungible means interchangeable, like dollars or bitcoin, where any unit substitutes for any other. A non-fungible token carries a unique identifier, so each one is distinct and not a one-for-one replacement for another. That uniqueness is what lets an NFT represent ownership of a specific item rather than a quantity of an identical asset.
Are NFTs a good investment?
They are among the most speculative assets available. Prices depend almost entirely on attention and on finding a later buyer, not on any cash flow, and most collections from the 2021 boom now trade far below their peaks or have no active market. The space also carries elevated fraud risk. Treat any money put into NFTs as capital you can afford to lose entirely.
How are NFTs taxed?
An NFT is treated as property for federal tax purposes, so selling one for more or less than you paid is a capital gain or loss, reported like other digital-asset transactions. The IRS has signaled that some NFTs may be treated as collectibles, which can be taxed at a higher long-term capital gains rate than ordinary investments. The specifics depend on what the NFT represents.
Sources
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