How Does an NFT Make Money? 5 Methods Explained
Understand how non-fungible tokens create financial value and generate returns in the evolving digital asset landscape.
Non-fungible tokens, widely known as NFTs, represent unique digital identifiers recorded on a blockchain. These digital assets certify ownership and authenticity, distinguishing them from fungible cryptocurrencies which are interchangeable. NFTs can represent various digital files such as art, music, videos, or even virtual real estate. They function like cryptographic tokens, but their unique nature means they cannot be directly swapped for one another. The ownership of an NFT is recorded on the blockchain, allowing for its sale and transfer.
Generating Revenue from Initial Sales
Creators primarily generate income from NFTs through their initial sale on primary marketplaces. This process, known as “minting,” involves transforming a digital file into a unique, verifiable token on a blockchain. Minting costs, including “gas fees” for transaction processing, vary depending on the chosen blockchain network and its current congestion.
Upon minting, creators list their NFTs for sale, typically on platforms like OpenSea or Rarible. They can set a fixed price or choose an auction format. When an NFT is sold, the proceeds are transferred to the creator’s digital wallet, minus any marketplace fees. For tax purposes, income from initial NFT sales is generally considered ordinary income for creators and is subject to federal income tax rates, similar to other business income.
Earning Through Secondary Market Royalties
NFT creators can establish a continuous revenue stream through secondary market royalties. These royalties are a percentage of the resale price, automatically paid to the original creator each time their NFT is resold. This mechanism is embedded within the NFT’s smart contract during the minting process. The royalty percentage, often set by the creator, typically ranges from 2.5% to 10% of the resale value.
Smart contracts ensure that these royalty payments are automatically executed and tracked on the blockchain, eliminating the need for intermediaries. Royalty income received by creators is generally treated as ordinary income for tax purposes, and may also be subject to self-employment taxes if NFT creation is part of a professional activity.
Profiting from Value Appreciation
NFT holders, including investors and collectors, can generate profit by purchasing an NFT and later selling it for a higher price. This profit stems from the appreciation in the NFT’s market value, driven by factors such as perceived scarcity, the creator’s reputation, community demand, and overall market trends.
The Internal Revenue Service (IRS) generally treats NFTs as property for tax purposes, similar to how cryptocurrencies are handled. When an NFT is sold for a profit, it typically triggers a capital gains tax event. The tax rate depends on the holding period: short-term capital gains (assets held for one year or less) are taxed at ordinary income rates, while long-term capital gains (assets held for over one year) benefit from lower rates.
Monetizing NFT Utility and Ecosystems
Beyond direct sales and resales, NFTs offer diverse avenues for income generation through their embedded utility within various digital ecosystems. One notable method is through Play-to-Earn (P2E) gaming, where NFTs represent in-game assets like characters, weapons, or virtual land. Players can earn these NFTs by engaging with the game and then sell them on marketplaces for real-world value, generating taxable income.
Staking NFTs provides another passive income opportunity. This involves locking up NFTs in decentralized finance (DeFi) protocols to earn rewards, often in cryptocurrency or other tokens. These rewards can be received periodically, such as daily or weekly, and contribute to passive income, which would be subject to income tax.
NFT lending and rentals allow owners to generate income by temporarily leasing their digital assets. For instance, a rare in-game NFT can be rented to another player for a fee, or an NFT granting access to exclusive content can be leased, with rental fees providing a steady revenue stream. Income from lending or renting NFTs is generally considered ordinary income.
Fractionalization enables shared ownership of high-value NFTs by dividing them into smaller, more affordable units. Lastly, NFTs can grant exclusive access to communities, events, or digital content, which can be monetized through membership fees or token-gated experiences.