How to Make Money From NFTs: Different Ways to Earn

Non-fungible tokens (NFTs) represent unique digital assets recorded on a blockchain. These cryptographic tokens cannot be replicated or substituted, making each one distinct. They can represent ownership of various digital items, such as art, music, videos, or in-game assets. NFTs offer a verifiable way to establish authenticity in the digital realm.

Understanding NFT Value Creation

The perceived and actual value of an NFT stems from several fundamental principles, distinguishing them from traditional digital files. A core aspect is scarcity, as each NFT is a singular, irreplaceable digital item recorded on a blockchain. This inherent uniqueness contrasts with fungible assets like cryptocurrencies, where one unit is interchangeable with another.

Utility plays a role in determining an NFT’s value, extending beyond digital art to provide tangible benefits or access. This can include entry to exclusive online communities, in-game assets, or special access to unique content. The provenance, or digital ownership history, of an NFT is publicly available on the blockchain, offering a transparent record of its creation and transfers, which contributes to its authenticity and value.

Community engagement and creator reputation also influence an NFT’s appeal and market demand. Projects with strong communities or those associated with well-known artists and brands often command higher interest and prices. Market demand and speculation drive value, as collectors and investors assess an NFT’s potential for appreciation based on trends and future relevance. These factors combine to make certain NFTs highly sought after.

Earning Through NFT Creation and Sales

Individuals can generate income by creating original digital assets and converting them into NFTs for sale. This process, known as minting, involves recording the asset’s information onto a blockchain, making it a unique, verifiable token. The initial step requires developing a digital artwork, music, video, or other creative piece, ensuring all intellectual property rights are held by the creator.

After preparing the digital file, creators select a blockchain network and an NFT marketplace to facilitate the minting and selling process. Popular blockchain options include Ethereum, Solana, Polygon, and Flow, each with varying transaction costs, often referred to as gas fees. Ethereum, while widely used, can have gas fees ranging from $50 to $150 during low congestion, potentially surging higher during peak times. Conversely, Solana offers negligible transaction fees, often less than a single cent, and Polygon’s fees can be under $0.01.

To cover these fees and manage transactions, a crypto wallet compatible with the chosen blockchain and marketplace is essential. Marketplaces like OpenSea and Rarible allow creators to upload their digital files, set details such as title, description, and attributes, and then mint the NFT. Some platforms offer “lazy minting” options, where the buyer pays the minting fees upon purchase, allowing creators to mint for free initially.

When setting prices, creators can choose a fixed price or an auction format, and they often define a royalty percentage for future secondary sales. Promoting the NFT through social media, community building on platforms like Discord, and collaborations can increase visibility and attract potential buyers. For tax purposes, income from selling self-created NFTs is considered ordinary income and is subject to self-employment taxes. This income, along with any related business expenses, should be reported on Schedule C for self-employed individuals.

Earning Through NFT Trading and Investment

Another approach to earning from NFTs involves buying and selling existing tokens, often called “flipping” or engaging in longer-term investment strategies. Flipping NFTs entails purchasing them at a lower price and reselling them quickly for a profit, capitalizing on short-term market movements. This strategy requires diligent market research to identify trends, understand market sentiment, and analyze project roadmaps.

Market research involves monitoring data points like the “floor price” (the lowest price for an NFT within a collection) and trading volume, which indicate demand and liquidity. Identifying undervalued NFTs is a common tactic for traders. Some traders acquire NFTs during early access sales or “mints” and sell them shortly before or after the reveal, aiming to profit from initial hype.

For longer-term investment, the focus shifts to projects with strong fundamentals, established communities, and clear future utility, with the expectation that their value will appreciate over time. Regardless of the strategy, understanding associated fees is important; marketplaces charge a service fee, around 2.5% per sale, which is deducted from the transaction. Gas fees, paid for transactions on the blockchain, also apply when buying or selling, particularly on networks like Ethereum.

From a tax perspective, the IRS treats NFTs as property, similar to other digital assets. Profits from selling NFTs are subject to capital gains tax.

If an NFT is held for one year or less before being sold, any profit is considered a short-term capital gain and is taxed at ordinary income tax rates, which can range from 10% to 37%. If held for more than one year, profits are long-term capital gains, taxed at lower rates of 0%, 15%, or 20%. However, the IRS has indicated that some NFTs are subject to a higher long-term capital gains rate of 28%. Taxpayers must report all gains and losses on IRS Form 8949 and Schedule D.

Earning Through NFT Utility and Royalties

Beyond direct creation and trading, NFTs can generate income through their inherent utility or contractual terms. One such method is Play-to-Earn (P2E) gaming, where players earn cryptocurrency or new NFTs by engaging in gameplay, completing tasks, or winning competitions. These in-game assets or earned cryptocurrencies can then be sold on secondary markets, providing a revenue stream for players.

NFT staking offers another passive income opportunity, where NFT owners lock their digital assets on a platform or protocol to earn rewards. Similar to cryptocurrency staking, this involves committing an NFT to support network operations, and in return, owners receive compensation, often in the platform’s native utility token. Rewards can vary based on the annual percentage yield (APY), the number of NFTs staked, and the NFT’s rarity, with distributions occurring daily or weekly. Staking rewards are considered ordinary income for tax purposes.

NFT lending and borrowing platforms allow NFT holders to use their assets as collateral to secure cryptocurrency loans, or conversely, to lend out their NFTs for a fee. Borrowers can access liquidity without selling their valuable NFTs, while lenders earn interest on the provided funds. Platforms like NFTfi facilitate peer-to-peer lending, where loan terms are negotiated directly between parties. Fees for lenders on such platforms can be around 5% of the interest earned.

Original NFT creators can also earn royalties from secondary sales of their NFTs. This mechanism, embedded within the NFT’s smart contract, allows creators to receive a predetermined percentage of the sale price each time their NFT is resold on a marketplace. Royalty percentages range from 5% to 10% of the sale value. While the IRS has not issued guidance on NFT royalty income, it is treated as ordinary income and is subject to self-employment tax.