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TECHNOLOGY

In order to mint an NFT, the NFTs are unique or ‘nonfungible’
Fungibility is a characteristic of a digital or physical
object that refers to its ability to be interchanged
minter must pay a fee to the or replaced with another item of the same type,
a concept called mutual interchangeability. Dol-
lar bills and shares of the same class of stock are
blockchain network. examples of fungible items.
The term nonfungible means an item is unique
and cannot be replaced with another item of the
same type. NFTs are nonfungible due to complex
encryption techniques that assign a unique ID,
Web3 leverages blockchain and public key called a “hash value,” to the underlying object. A
cryptography to demonstrate and protect the owner- blockchain NFT transaction will typically contain,
ship, authenticity, and integrity of digital data. Each at a minimum, the unique ID and associated wallet
participant on a blockchain ledger can hold a copy of addresses. (The term “wallet,” in this context, refers
all the transactions in the ledger, and new transac- to the online accounts where digital assets are held,
tions are added through complex cryptographic similar to logging in to a bank website and seeing
protocols, making it practically impossible to falsify the balances of different accounts.)
or change data recorded on a blockchain. Owner-
ship and authenticity in the internet’s anonymous NFTs are linked to an underlying item
zero-trust environment is far easier to prove with NFTs are distinguished from other digital assets in
blockchains, which are further protected from loss that they are always linked to an underlying item
or destruction simply because, in certain cases, the that could be digital, intangible, or physical. The
complete ledger is held by thousands of participants most common type of NFTs in existence in 2022
around the globe. are those linked to a graphic art file (e.g., JPEG,
PNG, GIF). NFTs’ ability to prove ownership and
CHARACTERISTICS OF AN NFT provide an auditable trail of activity via a blockchain
NFTs are a cornerstone of Web3. NFTs are control- has been revolutionary for graphic artists because
lable digital records that allow for digital and physical it allows them to have irrefutable proof that they
assets to be represented as unique, valuable, and easy- created and own or have rights to an image.
to-transfer “tokens.” NFTs can also be described as Creating an NFT for a physical item starts with
the tokenization of anything and everything, whether generating a document with information about the
physical or intangible, to enable blockchain-based item and its ownership. For example, if a group of
recording. NFTs have two distinct traits: They are people want to jointly own a Pablo Picasso painting,
unique (nonfungible), and they are always linked to a they could generate a document with ownership de-
physical, intangible, or digital item. tails and use agreements and then use the document

IN BRIEF

■ CPAs should become conversant digital item. perpetuals, and real assets.
with nonfungible tokens (NFTs), an ■ NFTs can be used to generate taxable ■ A GAAP standard does not yet exist
emerging technology that is growing revenue and create value. NFT records for digital assets, including for NFTs.
in popularity. kept on blockchains are crucial to CPAs can look to the AICPA’s Digital
■ NFTs are controllable digital records auditors evaluating assertions around Assets Working Group’s practice aid
that allow for assets to be represented the existence, rights and obligations, Accounting for and Auditing of Digital
as easy-to-transfer “tokens.” They are and valuation of digital assets. Assets for information.
unique (nonfungible) and are always ■ NFTs can be grouped into four
linked to a physical, intangible, or categories: single use, reusables,

To comment on this article or to suggest an idea for another article, contact Courtney Vien at Courtney.Vien@aicpa-cima.com.

24 | Journal of Accountancy October 2022