What are NFTs, how to purchase them and are they a good investment option?

In simple terms, an NFT is a blockchain record that represents ownership of a digital or physical asset, mostly a piece of digital art. While the asset itself is not stored on the blockchain, the NFT gives its owner exclusive access to it, which can be sold or transferred. 

Let's consider the example of NFT art a.k.a. cryptoart. When you buy an NFT artwork, you gain the rights to the original artwork, but only on the blockchain. Even though you can't control others from creating copies of the artwork, only one original artwork exists, and you own it on the blockchain. In some ways, this is similar to owning physical art. Even though you'll find various prints of The Starry Night in the market, there's only one original of the Van Gogh classic. Of course, the digital artwork may not be hanging in your home, but the NFT will give you a certificate of authenticity and ownership of that artwork. It's worth remembering that, in most cases, you don't own the copyright to the artwork when you buy an NFT, even if you get its ownership on the blockchain.

NFTs, like cryptocurrencies, represent a class of highly volatile assets. Similar to meme coins in cryptocurrency, NFTs can quickly rise in value and fall sharply depending on celebrity endorsements or social media hype. The value of an NFT largely depends on the hype around it and the community that supports it. Therefore, it's important to look beyond the hype and carefully research the project and community before buying an NFT.

Think before you buy is one of the most relevant NFT investment tips for beginners. What's popular today may not be popular tomorrow, and when that popularity becomes a factor in pricing, one needs to be careful. 

Fear of Missing Out (FOMO) is definitely real, but it shouldn't be the only thing influencing your investment decisions. A common mistake NFT investors make is not finding out more about the community and learning about the team behind the product. Consider finding out more about the creators, history, invested value and market sentiment around an NFT to understand its potential better. Spending some time learning about these aspects can help reduce your investment risk and also protect you from NFT rug-pull scams. 

Rug-pull scams are a common scam in the NFT market. They occur when a project is hyped up in the market to drive up value, but then the people involved sell all their stakes and disappear. This causes the value of the NFT to drop drastically, leaving regular investors with significant losses to contend with.

If you’ve transacted with NFTs in any way - bought, sold, gifted, traded, exchanged for cryptocurrency - you must declare all transactions and any capital gains or losses as part of your income tax return.

Generally, a capital gain or capital loss is the difference between what an asset cost you and what you received when you disposed of it. Be aware that the cost price must include any transaction fees charged. If you hold an NFT for more than 12 months you’ll be eligible to receive a 50 per cent discount on the Capital Gains Tax (CGT). However, individuals that buy NFTs and hold an asset for less than one year will be charged the full tax amount.

It’s in your interest to claim any losses sustained on your crypto investments. When you have both capital gains and losses in the same financial year, they’re calculated to establish your net capital gain or loss for that year. If you incur a net capital loss, this can be carried forward to a future capital gains year and used to offset those gains.

There are certain circumstances where you may claim NFTs as a personal use asset and be exempt from paying CGT.

Like any investment decision, whether you should invest in NFTs is a personal decision. You should take time to research and understand the risks when investing your money in volatile assets like cryptocurrencies or NFTs. If you want to buy an NFT as an investment, ensure you examine all aspects of the asset, such as availability and rarity, as everything that's popular today might not remain in vogue tomorrow. You may also want to buy NFTs to sell them, also known as flipping, as a quick way of making some profits. However, such strategies require you to time the market, which can lead to quick wins but also heavy losses. 

If you decide to invest in NFTs or cryptoart, ensure you do your due diligence rather than getting carried away by the hype. Keeping in mind the volatile price history of NFTs, you should also consider limiting the amount of money you invest to something you could afford to lose. You may also find it interesting to read about cryptocurrency regulation in Australia before investing your money in NFTs or crypto.