What is an NFT?

NFTs are involved in everything from art to event tickets and even real estate. But what is an NFT? And how do they actually work? Dive into the wide world of NFTs in our 2026 NFT Guide.

What is an NFT?

An NFT, or non-fungible token, is a one-of-a-kind digital asset stored on a blockchain. Unlike regular cryptocurrencies such as Bitcoin or Ethereum, each NFT is unique and can’t be swapped on a like-for-like basis.

Think of NFTs as digital certificates of authenticity that can be linked to almost anything: artwork, music, videos, collectibles, or even a ticket to a real-world event. They’re powered by blockchain technology, which ensures that the record of ownership and the asset’s uniqueness can’t be tampered with.

The term “non-fungible” just means that the token has its own distinct properties. You can trade one Bitcoin for another Bitcoin and have the same thing, but if you trade one NFT for another NFT, you’re swapping two completely different items.

History of NFTs

Here’s a quick timeline of how NFTs have evolved:

• 2012–2014: Early experiments like Colored Coins on Bitcoin’s blockchain explore the idea of unique tokens.

• 2017: CryptoPunks and CryptoKitties launch on Ethereum, introducing NFTs to the mainstream crypto audience.

• 2020: Platforms like Rarible and OpenSea gain popularity, making it easier for creators to mint and sell NFTs.

• 2021: The NFT boom. Beeple’s “Everydays” sells for $69 million at Christie’s, NBA Top Shot surges in popularity, and celebrities start dropping their own NFT collections.

• 2022–2023: Market correction as NFT hype cools, but utility-focused projects emerge (gaming, ticketing, identity).

• 2024–2026: NFTs expand into real-world applications like event passes, real estate tokenization, and AI-generated collectibles.

How do NFTs work?

NFTs live on blockchain networks, most often Ethereum, though other blockchains like Solana, Polygon, and Flow are also popular.

Here’s the basic process:

1. Creation (minting): An NFT is “minted” onto the blockchain using a standard like ERC-721 or ERC-1155. This step gives the NFT its unique metadata, ownership record, and sometimes links it to a digital file like an image or video.

2. Ownership & transfers: Once minted, an NFT can be bought, sold, or traded. All these transactions are recorded on the blockchain, making it publicly verifiable.

3. Storage: The NFT’s ownership record is on the blockchain, but the associated file (like an image) might be stored off-chain in places like IPFS (InterPlanetary File System) or centralized servers.

4. Smart contracts: These self-executing pieces of code allow NFT creators to set special rules, like automatically earning royalties each time the NFT is resold.

The main difference from cryptocurrencies is fungibility: one Ether (ETH) is exactly the same as another Ether, but each NFT is completely distinct

Types of NFTs

NFTs can represent a huge range of assets, both digital and physical. Here are a few main categories:

• NFT art and collectibles: NFT art put the space on the map, from Beeple’s record-breaking Christie’s auction to PFP collections like CryptoPunks and Bored Ape Yacht Club.

• NFT trading cards: Trading cards but on the blockchain, including some well-known trading card games, like Pokémon and Magic: The Gathering. NBA Top Shot also introduced NFT trading 'Moments', which were digital video highlights of NBA and WNBA games.

• Gaming NFTs and Metaverse assets: These NFTs include land, avatars, skins, and weapons in virtual worlds like Decentraland, Sandbox, and Illuvium.

• Music, film, and media NFTs: Musicians and creators are releasing albums, tickets, and VIP experiences as NFTs, giving fans new ways to engage and creators new income streams.

• Tokenise real-world assets: NFTs can represent physical assets like luxury products, deeds, and certificates of authenticity.

Examples of NFTs

Here are some real-world examples of NFT collections:

• Digital art:  Beeple’s Everydays series, XCOPY’s animated glitch art, or Pak’s Merge project.

• Music NFTs: Artists like 3LAU and Snoop Dogg are releasing songs and albums as NFTs, granting fans perks like exclusive concert access.

• Collectibles: NBA Top Shot moments, Sorare football cards, or Pokémon-inspired Axie Infinity creatures.

• Gaming items: Wearables in Decentraland, rare skins in Illuvium, or weapons in Big Time.

• Event tickets: Coachella NFT passes offering lifetime entry, or sports teams issuing blockchain-verified tickets.

• Physical assets: Luxury brands linking NFTs to real handbags, watches, or sneakers as proof of authenticity.

How are NFTs used in real life?

• Gaming: NFTs are shaking up the gaming industry by letting players truly own their in-game assets. A sword, skin, or rare mount bought in one game can potentially be traded or sold outside of it, sometimes even used in other compatible games. Titles like Axie Infinity and Illuvium are leading this charge.

• Events & memberships: An NFT can be your ticket to an event, but it can also be a lasting digital collectible after the event ends. Coachella sold lifetime festival passes as NFTs, while other projects use NFTs to grant VIP memberships to clubs, restaurants, or online communities.

• Real estate: In both the real and virtual worlds, NFTs are being used to prove ownership of land and property. In the metaverse, platforms like The Sandbox and Decentraland sell plots of virtual land as NFTs. In the physical world, tokenization projects are experimenting with turning deeds and titles into NFTs for easier transfer and verification.

• Identity & credentials: NFTs can also serve as verifiable credentials. Think diplomas, certifications, or licenses stored on the blockchain. This makes them nearly impossible to forge and easy to verify without contacting an issuing authority.

• Fashion & luxury goods: Luxury brands are embracing “digital twins”, so NFTs that correspond to physical products. This way, a Gucci bag or Rolex watch can come with a digital proof of authenticity that travels with it, making counterfeiting far harder.

Benefits of NFTs

In a world of art appreciation and collecting unique items, NFTs have their benefits. Here are some of the core benefits that draw people to them.

Proof of ownership

At the heart of NFTs is blockchain verification, which acts like a public, tamper-proof receipt. If you own an NFT, anyone can confirm that ownership by looking at the blockchain record. This transparency makes NFTs especially valuable for digital art, collectibles, and rare items, where proving authenticity has always been tricky. It’s the difference between saying “trust me” and being able to point to an immutable public record.

Royalties for creators

One of the most game-changing features of NFTs is the ability to bake royalties into the token’s smart contract. This means artists, musicians, and other creators can automatically earn a percentage every time their NFT is resold, forever. Traditional art markets don’t offer this kind of recurring income, so for many creators, NFTs aren’t just a one-time payday, but a potential source of ongoing revenue.

Global reach

Because NFTs live on decentralized blockchains, there’s no middleman controlling where they can be sold or who can buy them. Whether you’re an artist in Tokyo selling to a collector in New York, or a game developer in Brazil trading assets with someone in France, NFTs make cross-border transactions as simple as sending an email.

Programmable utility

NFTs aren’t just static images or files; they can have extra perks programmed in. For example, owning an NFT might grant you access to exclusive Discord channels, early product drops, or even future airdrops of other tokens. Some NFTs can even evolve over time, changing their appearance or features based on real-world events or how the owner interacts with them.

Fractional ownership

For high-value items like luxury art or rare real estate, NFTs can be split into smaller, tradeable fractions. This lets multiple people share ownership of a single asset, kind of like owning shares in a company, except it’s shares of a Monet painting or a prime piece of metaverse land.

Risks of NFTs

Despite their successes, NFTs continue to face several challenges.

Market volatility

The NFT market moves fast, sometimes too fast. Prices can spike overnight based on hype, then crash just as quickly. If you buy at the peak of a trend, you could see your investment lose significant value in days or even hours.

Speculative nature

While some NFT projects have clear long-term value, many are built purely on hype. Without ongoing development, community support, or a real use case, these projects can fade quickly, leaving holders with digital collectibles that nobody wants to buy.

Scams & fraud

The NFT space is still young and largely unregulated, which means scams are common. Fake collections can pop up overnight, phishing sites try to trick users into giving up their wallet access, and “rug pulls” happen when project founders disappear with investors’ money.

Environmental concerns

Although Ethereum’s shift to proof-of-stake in 2022 drastically reduced its carbon footprint, not all blockchains use energy-efficient systems yet. Some still rely on proof-of-work, which consumes a lot of electricity. This environmental impact remains a point of criticism for NFTs.

Illiquidity

Unlike stocks or major cryptocurrencies, NFTs don’t have a constant market of buyers. If you want to sell your NFT, you might wait days, weeks, or months to find someone willing to pay your asking price, if they buy at all.

How do NFTs make money?

NFTs make money in several ways. The most direct is through primary sales, where creators mint and sell NFTs to collectors, like Beeple’s Everydays, which sold for $69 million at Christie’s in 2021. They can also earn ongoing royalties, with smart contracts sending a percentage of every resale back to the original creator, a model especially powerful for artists and musicians.

Some traders profit by “flipping” NFTs, buying early and selling when demand spikes, as seen with early Bored Ape Yacht Club buyers who paid about $200 and later sold for hundreds of thousands. Others focus on utility-based NFTs, which grant perks like exclusive event access, premium content, or commercial rights that can themselves generate income.

NFT marketplaces

NFT marketplaces are the backbone of the NFT economy, connecting creators and collectors worldwide. The best NFT marketplaces include:

• OpenSea

• Rarible

• Blur

• Magic Eden

Each offers different strengths, with OpenSea known for its scale and Magic Eden for dominating the Solana NFT ecosystem. Finding the right marketplace for you, whether your are buying, selling, or minting, involves choosing one that supports your preferred blockchain, transaction fees and royalty payments that you agree with, and an active community that is willing to buy and trade.

Bitcoin Ordinals

Bitcoin Ordinals are unique digital assets that are created by inscribing data, such as images, videos, or text, onto individual satoshis (the smallest units of Bitcoin). These inscribed satoshis function similarly to NFTs and can be bought, sold, and traded. By using the Bitcoin blockchain, Ordinals benefit from Bitcoin’s security and decentralization, making them a novel way to create digital collectibles.

NFT Taxes

NFTs are taxable, and the IRS, ATO, HMRC, CRA, and EU tax offices all have rules.

Buying an NFT with fiat is not taxable. Buying with crypto counts as a disposal and may trigger capital gains tax. Selling NFTs is taxable, with investors paying capital gains and creators potentially owing income tax. Trading one NFT for another is also taxable. Minting is not taxable until a sale occurs. Our full NFT taxes guide explains these scenarios in detail.

The IRS has clarified that some NFTs may be taxed as collectibles under a 28 percent long-term capital gains rate, applying a “look-through” analysis to the underlying asset. UK, Australian, Canadian, and EU authorities treat NFTs broadly as crypto assets, though rules vary.

More complex cases include NFT farming or staking, which can be taxed as income, and even state-level sales taxes, as seen in Georgia. Investors can reduce their liability through NFT tax loss harvesting, offsetting gains with losses from underperforming NFTs.

Tools like Koinly make this process easier by tracking NFT transactions across wallets and generating reports for the IRS, HMRC, ATO, CRA, and more.

The Future of NFTs

Looking ahead, NFTs are likely to expand in gaming and metaverse economies, token-gated memberships, DeFi integrations such as NFT lending, dynamic and AI-generated NFTs, and enterprise applications in supply chains, real estate, and digital identity.

Don’t forget the tax bill…

Any profits from trading or selling NFTs are taxable. You can learn more in our NFT tax guide, or sign up to Koinly to calculate your NFT taxes.