Trading 101: How To Buy An NFT

In March 2021, two CryptoPunk NFTs sold for $7.5 million. In the same month, a digital collage by contemporary digital artist Beeple sold for $69.3m. Believe it or not, the NFT space is still in its relative infancy, so the fact you’re taking the time to read this article means you’re still one of the early ones in terms of NFT knowledge. So let’s begin.

How to buy an NFT in five steps

1. Hunt for exciting NFT projects

2. Buy some cryptocurrency

3. Connect your NFT wallet to an NFT marketplace

4. Purchase NFT in marketplace

5. Display your NFT

Step one: hunt for exciting NFT projects

This is the fun part where you get your NFT goggles on and go searching for the best and most exciting projects out there. Whether you're in NFTs to look for unknown gems that will see their value skyrocket, or to invest in a resonating community with a meaningful message, this is where you get into the trenches and scope out projects.

How to find NFT projects

Look for NFTs that resonate with you on a cultural level. Follow NFT experts on Twitter, follow artists and see what projects the general community is hyping up. 

Remember to search within the subcultures you are already part of. Whether it's in sport, music, skating, art, fashion, philosophy, philanthropy— there are projects popping up everywhere across all kinds of communities. 

Twitter

Twitter is a great place to find reliable projects. Most projects will have a profile, alongside NFT experts constantly looking for the next big projects to invest in.

• If you want a cool tip on finding new, undiscovered projects, keep an eye on who these experts are following and interacting with. It's likely these projects will have a page, and you can check them out this way. 
• This means you don't spend hours going through marketplaces blind, not knowing whether you're looking at an undiscovered gem, or something worthless.
• A word of warning though - there's plenty of bots on Twitter spamming scammy NFT projects, so beware. If something sounds too good to be true, it probably is.

Reddit

Reddit is another great place to access great information about the NFT project, dropouts, giveaways. You can be part of any subreddit around NFT

Here are some good subreddits to follow for NFT information:

• NFT
• NFTmarket
• SolanaNFTs

Whatever you do, invest in what you like (whether that's the art itself or the culture behind it), not what you think will make you money.

How to know which NFTs will hold long-term value

It's no secret that many NFT enthusiasts and investors are saying that the vast majority (up to 97%) of NFT projects will eventually become worthless, and this is becoming apparent as more and more projects become illiquid as the crypto winter continues. To avoid choosing the wrong projects, you need to consider two main things. 

First, look for the projects which have reliable, credible creators with a solid team behind them. Just like anyone can put paint to canvas, anyone can create an NFT— knowing which ones are valuable or not is a large part of the game now.

Second, make sure the project has a meaning, purpose and community behind it. NFTs that are made for the sake of it are destined to fail in the long-term. The reason for this is simple: people stop caring. The projects that will see long-lasting growth and maintenance value are the ones that cater to a specific community or worldview. 

A great example of a well-run NFT project with an amazing purpose is the World of Women. When WoW launched in July 2021, its goal was to diversify the NFT space by attracting more women into it. In their own words, WoW is ‘a community celebrating representation, inclusivity, and equal opportunities for all. United by a first-of-its-kind collection, featuring 10,000 artworks of diverse and powerful women. Projects like these may be a great option to invest in because they have a long-term vision with a passionate following.

What is an NFT community?

An NFT community is where a culture has been created around a project, which then drives a following who talk and spread the idea of the project. These people tend to have similar interests and motives, and are all intent on making the project succeed. To look at an example, Bored Ape Yacht Club (BAYC), isn’t just 10,000 JPEGs of different apes. It was launched with a vision. 

BAYC created a community, or exclusive club, that people could only join by buying their NFTs. This attracted everyone from NFT enthusiasts to major celebrities like Snoop Dogg, Eminem and Gwyneth Paltrow. BAYC’s commitment to their vision and community has driven continuous value — the community was the appeal, not the art itself.

So, when looking for projects, make sure you tap into their community. It's a pretty reliable indicator as to the potential success of a project.

Step two: buy some cryptocurrency

NFTs are almost exclusively bought using cryptocurrency.

Most NFT marketplaces run on the Ethereum blockchain. This means you need to buy some ETH on an exchange (such as Gemini, Binance or Coinbase). 

Side note: If you are choosing to purchase an NFT on the SOL blockchain, you’ll need to buy SOL instead, but don’t worry about that for now. Make sure you read the next steps on this guide before you make a decision on which crypto to buy.

Once you own some Ethereum on an exchange, you can then transfer this to a digital wallet. This may seem like a convoluted way of doing things, but it’s all in place to make sure your digital assets are safe and secure. Besides, it doesn’t take long, and once you have your exchange and wallets setup, everything else becomes easy.

The wallet you choose is dependent on which blockchain your chosen marketplace runs on. Most marketplaces, such as OpenSea and Rarible, run on the Ethereum blockchain. This requires you to use wallets such as:

• MetaMask
• Coinbase Wallet
• Trust Wallet

Again, if you are buying an NFT from the SOL blockchain, you’ll need a different type of wallet. But we’ll discuss those later, when we’re talking about Solanart.

For some marketplaces, however, you can buy crypto straight from them. Keep in mind though, the transaction fees tend to be much higher so it’s much better to purchase crypto from exchanges first and transfer them to your wallet.

Step three: connect your wallet to an NFT marketplace

An NFT marketplace is a platform to buy, sell and browse NFTs. 

To sign on to an NFT marketplace, you’ll need a digital wallet. Your wallet acts as a username and password and lets you interact with the NFT marketplace, such as the ones listed below. Once you’ve connected your wallet, you’re ready to start browsing the market and placing bids.

Where can I buy an NFT?

OpenSea

OpenSea is the world’s first and largest marketplace where you can buy and sell NFTs. It is like the Amazon for NFTs— it has pretty much every project going on a clean, easy-to-use platform. If you're searching for an NFT, OpenSea is a very good place to start. However, given its huge size and ease of use, it means many nonsense projects exist there, including fake duplications of other famous projects. The downside to buying NFTs on the primary marketplace is it’s hard to estimate the demand for the art— anyone can upload on there and there’s a literal sea of projects. This sometimes makes navigating on the site quite difficult in terms of finding NFT gems. 

OpenSea operates on the Ethereum blockchain, which is where the majority of marketplace are setup. This has the pro of a larger marketplace with a diverse range of projects, but the con of having to pay gas fees (we’ll talk more about these later).

Rarible

Rarible is another leading NFT marketplace that runs on the ETH blockchain. This platform hosts a variety of NFT categories, including photography, music, digital art, domains, metaverses, and games. You will find some NFTs put on sale at a fixed price and others that are being auctioned. 

Like most other marketplaces, Rarible takes a 5% cut on every sale and splits it equally between the buyer and the seller. That means both parties have to pay 2.5% of the final price. Payment is quite flexible on Rarible because it supports over 20 cryptocurrencies, some of which include ETH, DAI and it’s native crypto, RARI.

Nifty Gateway

Nifty Gateway is an exclusive marketplace for expert artists and is built on the Ethereum blockchain. The NFTs here are called “Nifties.” It’s a marketplace where the only sellers you’ll find are renowned musicians and artists, unlike OpenSea where anyone can post.

Nifty Gateway isn’t fully decentralised because digital assets are stored on the platform instead of the blockchain. Nifties go up for sale every three weeks. If you want to buy an NFT on Nifty Gateway, you can send in blind offers, participate in raffle draws, or bid in auctions.

Solanaart

Now, this is one you won’t see on too many obvious lists. This is because unlike the majority of marketplace (like the two mentioned above), Solanart does not use the ethereum blockchain for its NFTs. Nope. It instead uses— you guessed it— Solana.

You might be thinking: what's the benefit of this? Why would I mint my NFT using a less popular blockchain? But that's just it. The Ethereum NFT space is so popular that it is crowded and saturated. This makes it difficult for newcomers in the space to garner attention. What's more, the saturation on the ETH network means that gas fees (we’ll explain what these are later) are super high. This is putting some buyers off, since sometimes they end up paying more for the gas fee than for the NFT itself.

So, if you’re looking to create a new project, consider putting it on Solana. Who knows, just like Google took over from Yahoo in the search engine battle of the late 90s, maybe Solana can beat the giants of OpenSea and Rarible. It’s a calculated decision and entirely up to you. There are benefits to both systems. 

Wallets compatible with the SOL blockchain include:

• Phantom
• Solflare

Step four: purchase your NFT on a marketplace

So, you've picked your NFT and you're ready to purchase. The next step should be easy, and it often is, but it’s not uncommon to run into difficulties. Buying an NFT is not the same as purchasing an item on Amazon or eBay— there are other factors at play which make it more complex.

To use the most common example, let’s pretend you wanted to buy an NFT off OpenSea. If you've got your wallet sorted, it should log you in automatically. If it doesn't click the wallet icon in the top right corner, and login to your wallet.

Find the NFT on the marketplace (make sure it’s official)

Next, if you know the project you're looking for, you can type it in on the search engine. Let’s say you were buying a World of Women piece. You’ll see here that it is pretty easy to find: once you type it in, there is a blue tick which indicates that the collection is authentic. You need to be careful and ensure the project you choose is authentic, as there are a lot of fakes out there. 

Tip: If you are unsure about whether the collection you have clicked on is official, go to the projects website or Twitter. They will usually have a link that you can be certain will navigate you to the official collection. You will see a few pieces of data, such as ‘floor price’. 

So, if you just want to be part of a community and are not too fussed about the piece itself, just go for one on the floor. If you are more focused on the individual NFT itself, browse through and find one you like.

Purchase the NFT

Once on the NFT listing, you’ll see two buttons. ‘Buy Now’ or ‘Make Offer’. If you are happy with the price the NFT is being offered at, click 'Buy Now'. 

You will be taken to another page and assuming you have enough funds, you can click ‘Confirm Purchase’. Once you do this, first you will pay a gas fee. This is a fee paid to ETH-miners, and is usually between $90-$150 depending on how busy the network is. 

After gas fees are paid, the relevant funds from your wallet will be transferred to the previous owner and the NFT will appear in your profile. 

If you decide to make an offer, you are required to input an amount less than the buy now option (obviously). You can then set a time limit in which the NFT owner has time to accept or not. If the time runs out, your offer is automatically rejected. 

Step five: display your NFT

So now you're a proud NFT owner- congrats! You are officially a part of the NFT community, and it’s your right to showcase it. Let’s get into some cool ways to display your NFT to the world (other than just having it as a screensaver on your phone for you to look at).

Display your NFT online

Although they may be digital assets, you can still display your NFTs to the public. One popular way of doing this is to put it as your profile picture on social media, such as Twitter or Instagram. Twitter has even added a verification process which means only the true owners of that NFT can have the image as their profile picture.

Then there's a bunch of a web-based social media platform for NFTs, where you showcase your favorite crypto art. Basically, it’s the Instagram of NFTs – you can follow other users to populate your feed, you can like, share, and comment on their NFTs, and discover what’s trending on the platform. When you sign up for an account, connect your wallet and choose the NFTs you want featured on your profile. Examples of these include Showtime, Lazy and OnCyber.

Display your NFT in real life

Whether it's hanging up a printed version or using a screen to display it, there are some really cool ways to display your NFT in your home or work space.

Showcasing your animated NFTs in their full glory using a video frame is perhaps the most interesting— it’s like being in some futuristic gallery. These are digitised frames made for NFTs, and all you need to do is sign in to your wallet, connect to WiFi, and begin casting your owned digital piece.

Keep in mind though, these frames don’t come cheap – a 10” frame may cost over $300. Still, it’s worth the investment if you want to do your NFTs justice, and let’s be honest – having an entire screen dedicated to a digital asset is pretty innovative interior design.

Now that we've covered those five steps, let’s answer some other popular questions regarding how to buy your first NFT.

How do NFTs work?

When your artwork is minted, this means smart contracts supported by the blockchain are used to create a digital certificate of ownership. Like other assets on a blockchain, the records of NFT ownership are public and maintained by thousands of users.

Some smart contracts will have additional benefits for either the artist or the buyer. For example, they may have an agreement in place for the artist to retain a cut of any future sales of the NFT or they may give the buyer the rights to use the NFT in merchandise. 

Though the focus on NFTs in mainstream media is currently art, the potential for NFTs and their current uses is far more vast than this. NFTs can add scarcity to everything from digital assets in the entertainment industry to the finance industry.

Can you sell an NFT for free?

When you list an NFT for sale, most marketplaces don’t charge any fees but some do charge service fees right away. Others charge this fee when the NFT is sold, along with the gas fees needed to pay for completing the sale.

A few marketplaces follow the model where the buyer pays the gas fees when you sell an NFT at a fixed price. When you auction off the NFT, most marketplaces require you to pay the gas fees to accept the highest bid. Some marketplaces like OpenSea cover the gas fees for you for auctions and only require you to pay the service fees to the platform.

All in all, gas fees are there but the amount to be paid or who will pay it will vary for marketplaces. So, before you decide to sell on a marketplace, it’s important to understand how they operate. 

So, in short, you can’t really sell an NFT for free. There is always some kind of fee involved.

Why buy an NFT?

NFTs hold intrinsic value

As explained, NFTs provide scarcity to digital assets. It’s the authenticator that makes replicas, such as screenshots, of virtual assets have value. But scarcity alone does not automatically make something valuable. The real reason people are paying millions of dollars for these is because of what the NFTs represent — they are social currency.

We recognise the intrinsic value in many assets that are devoid of tangible practicality. Take buying expensive physical art, re-sold sneakers, or Fortnite skins, for example. These items here hold very extrinsic value (it’s not like you can pull out the Fortnite skin and wear it to the shops), but yet are still desirable. 

NFTs express world views and being part of a subculture

Why is this? NFTs allow you to communicate with others, express world views, and convey a social signal to the universe and your peers. Humans have been doing it for centuries, just in different forms. NFTs happen to be the newest form. 

They’re also communal. Holding an NFT means you are part of a community along with other people who hold one. Take the Bored Ape Yacht Club as an example. Holders of an ape feel like they are part of an exclusive club, and thus have a lot of pull. So much pull, in fact, that even celebrities like Eminem, Shaquille O’Neal, Snoop Dogg and Gwyneth Paltrow started getting involved. They wanted to be part of that community.

When all this discussion of conceptual value is stripped down to its bare bones and oversimplified to the maximum, it comes down to this single, subjective word: coolness. And, like it or not, holding onto certain NFTs is cool.

NFTs may make good long-term investments

When you look at potential  projects to invest in, you have to decide whether it will have long-term staying power. To see what characteristics make an NFT project with long-term investment value, see our tips earlier in the article.

What are NFT gas fees?

When you buy an NFT, you will be met with something called gas fees.

Gas is the unit that measures the amount of computational power required to perform a transaction on the blockchain. Similar to the gas you put in your car, this intangible gas fuels all specific actions that you execute on the blockchain.

For every transaction on the Ethereum blockchain, there’s a series of computational steps. And each step needs resources to perform. And someone needs to pay for the use of these resources. The miners won’t pay for these out of their pocket. So, it’s the end-users who have to pay for the use of resources to execute a transaction on the blockchain. This fee that you have to pay for the amount of gas that is used for your transaction is known as the gas fee.

Keep in mind, gas fees fluctuate. You can keep an eye on the gas fee at any given time on web sites like Etherscan.

Do you pay tax on buying NFTs?

NFTs are viewed within the scope of crypto assets by most tax offices - although there are some specific exceptions to this, like in the US. This means the same rules that apply to your crypto will apply to your NFTs. But different rules may apply to creators and buyers.

In most countries, this means NFTs will be subject to Capital Gains Tax in many instances. Let’s go through the common NFT transactions and look at the tax rules for them.

For an in-depth guide on how NFTs are taxed, please take a look at our detailed guide. 

NFT tax USA

The IRS has issued guidance on NFTs that states NFTs may be treated as a capital asset (like crypto) or a collectible, depending on the particulars of the NFT. This means in some instances, if your NFT is deemed a collectible and you've held it for more than a year, you'll pay the higher 28% long-term Capital Gains Tax rate on collectibles. You can find out more about how NFTs are taxed in the US in our guide, but to summarize:

• Selling or trading NFTs: Capital Gains Tax, but the higher 28% tax may apply for NFTs deemed collectibles.
• Buying NFTs: No tax if you buy with fiat currency, but buying an NFT with crypto would be seen as a crypto-to-crypto trade.
• Minting/creating your own NFT: No tax - though minting costs may be able to be added to your cost basis.
• Selling NFTs you created: Potentially Income Tax.

NFT tax UK

HMRC hasn’t issued specific guidance for tax on NFTs just yet, but here is a quick summary of what you can assume:

• Buying an NFT with fiat currency: Not taxable.
• Buying an NFT with cryptocurrency: Capital Gains Tax.
• Selling an NFT for crypto or fiat currency: Capital Gains Tax.
• Swapping an NFT for another NFT: Capital Gains Tax.
• Minting an NFT: Not taxable.
• Farming NFTs: Could be subject to Capital Gains Tax or Income Tax.
• Gifting an NFT: Capital Gains Tax (unless gifting to your spouse in which case it’s tax free).

If you want to find out more about how crypto is taxed in the UK, check out our extensive guide, updated for 2022.

NFT tax Australia

The ATO is one of the few tax offices that has issued guidance on NFTs. The ATO says the tax treatment of NFTs follows the same tax treatment as cryptocurrencies. In short:

• Buying an NFT with fiat currency: Not taxable.
• Buying an NFT with cryptocurrency: Capital Gains Tax.
• Selling an NFT for crypto or fiat currency: Capital Gains Tax.
• Swapping an NFT for another NFT: Capital Gains Tax.
• Minting an NFT: Not taxable.
• Farming NFTs: Could be subject to Capital Gains Tax or Income Tax.
• Gifting an NFT: Capital Gains Tax.

It’s important to note that if you’re selling NFTs as a business (like an art dealer) this would be subject to Income Tax instead.

If you’re interested in discovering more about how crypto is taxed in Australia, see our detailed guide.

NFT tax Canada

The CRA hasn’t yet issued any specific guidance on tax on NFTs. However, it’s safe to assume that like most other tax offices, NFT tax will follow existing crypto tax rules. 

Canada is a little different than other tax offices, however. Crypto is subject to either Income Tax or Capital Gains Tax, but it all depends on how you’re trading and at what scale as to whether you’re taxed at a lower Capital Gains Tax rate or at your normal Income Tax rate. The CRA decides this on a case by case basis, but if you’re trading NFTs to make money, there is a good chance you’ll pay Income Tax instead of Capital Gains Tax.

This said, for those trading, the tax rules on NFTs in Canada are:

• Buying an NFT with fiat currency: Not taxable.
• Buying an NFT with cryptocurrency: Capital Gains Tax.
• Selling an NFT for crypto or fiat currency: Capital Gains Tax.
• Swapping an NFT for another NFT: Capital Gains Tax.
• Minting an NFT: Not taxable.
• Farming NFTs: Likely subject to Income Tax.
• Gifting an NFT: Capital Gains Tax.

Find out more about how crypto is taxed in Canada.

How Koinly helps you deal with NFT taxes

Koinly is a crypto tax calculator that simplifies crypto tax. All you need to do is import your crypto transactions and it calculates your capital gains, losses, income and expenses in one simple tax summary. 

Koinly imports NFTs (ERC-721 & ERC11-55) automatically for most EVM-based blockchains such as ETH, BSC, FTM, AVAX, Poly, Cronos etc. If we don't support your NFT yet, to add your unsupported NFTs to Koinly, please see how to manually add NFT trades.

Once you’ve added or imported your NFT transaction(s), Koinly calculates the proceeds, gains or losses and adds it to your tax report.

You can download specific tax reports for your local tax office in Koinly. For example, the IRS Form 8949 and Schedule D for the US, HMRC Capital Gains Summary for the UK, or the ATO myTax report for Australia.