How to Make Money in Web3: An Overview of Methods

Web3 represents a fundamental shift in how individuals interact with the internet, moving towards decentralized systems and digital ownership. Unlike Web2, which is characterized by centralized platforms controlling user data and content, Web3 aims to empower users by distributing control across a network. This new iteration of the internet leverages blockchain technology to enable peer-to-peer interactions, fostering transparency and granting users greater agency over their digital assets and online experiences. The underlying infrastructure of Web3 prioritizes user autonomy, shifting away from intermediaries and towards direct, verifiable interactions.

Establishing Your Web3 Foundation

Participating in the Web3 ecosystem begins with establishing a secure digital foundation, primarily through a non-custodial wallet. A non-custodial wallet, such as MetaMask or Phantom, gives you complete control over your digital assets and cryptographic keys, unlike custodial services where a third party holds your assets. Setting up such a wallet involves downloading a browser extension or mobile application and following prompts to create a new wallet, which includes generating a unique seed phrase. This seed phrase, a sequence of 12 or 24 words, acts as the master key to your funds and must be stored offline and securely, as its loss means irreversible access to your assets.

Once your non-custodial wallet is set up, the next step involves acquiring initial cryptocurrency. This is done through a centralized exchange, which functions similarly to a traditional brokerage account, allowing you to convert fiat currency into digital assets like Ethereum or Solana. After purchasing, you can transfer these cryptocurrencies from the exchange directly to your non-custodial wallet using the wallet’s public address. This transfer moves your assets from the centralized exchange’s control to your personal wallet, placing them under your direct ownership.

Engaging with Web3 applications requires understanding transaction fees, referred to as “gas fees.” These fees are payments made to network validators who process and secure transactions on a blockchain, compensating them for the computational resources expended. Gas fees fluctuate based on network demand and complexity of the transaction, with higher demand leading to increased costs. For example, on the Ethereum network, gas fees are paid in Ether (ETH) and are denominated in “gwei,” a small fraction of ETH. These fees are necessary to incentivize network participants and to deter malicious actors from overwhelming the network with spam transactions.

Earning Through Decentralized Finance

Decentralized Finance (DeFi) offers various methods for earning income by participating in open, permissionless financial protocols. Staking is one method where you lock up your cryptocurrency holdings to support the operations and security of a blockchain network. By participating in staking, you contribute to the network’s consensus mechanism and, in return, receive rewards, in the form of additional cryptocurrency. These rewards are considered ordinary income by the IRS at their fair market value in U.S. dollars at the time you gain “dominion and control” over them, meaning you can freely move or sell them. If you later sell these staked assets, any appreciation in value since the time of receipt may be subject to capital gains tax.

Lending your cryptocurrency to others through decentralized platforms is another earning opportunity within DeFi. By depositing your digital assets into lending pools, you make them available for borrowers and earn interest on your contributions. The interest rates can vary based on market demand and the specific platform used. Interest earned from crypto lending is taxable as ordinary income at its fair market value when received. While taking out a crypto loan is generally not a taxable event, earning interest on loaned crypto is.

Providing liquidity to decentralized exchanges (DEXs) is another way to earn by enabling token swaps. Liquidity providers contribute pairs of tokens to a liquidity pool, which facilitates trading between those assets without a centralized intermediary. In exchange for providing this liquidity, you earn a portion of the trading fees generated by the pool, and additional liquidity mining rewards. These earnings, whether from trading fees or reward tokens, are taxable as ordinary income. Impermanent loss can occur when the price ratio of the deposited tokens changes after you provide liquidity, potentially leading to a loss in value compared to simply holding the assets.

Earning Through Digital Assets

Digital assets, particularly Non-Fungible Tokens (NFTs), present distinct avenues for earning in the Web3 space. Creating and selling NFTs involves minting original digital content, such as art, music, or collectibles, onto a blockchain and listing them on marketplaces. The process of minting an NFT itself is not a taxable event unless there is a cost involved, such as a gas fee, which may be considered part of the cost basis. When you sell an NFT, any profit is subject to capital gains tax, with rates varying based on how long you held the asset. If held for one year or less, short-term capital gains are taxed at ordinary income rates, while long-term gains (held over one year) are taxed at preferential rates. Some NFTs may be classified as “collectibles” by the IRS and taxed at a higher 28% long-term rate.

NFT creators can also earn royalties from subsequent resales of their digital assets on secondary marketplaces. These royalties are programmed into the NFT’s smart contract, ensuring the creator receives a percentage of each future sale. Royalty income from NFTs is treated as ordinary business income, especially if the creation and sale of NFTs are part of a regular professional activity. This income may also be subject to self-employment tax. Accurate record-keeping of all transactions, including initial costs and received royalties, is important for tax compliance.

Trading and flipping NFTs involves buying digital assets with the intention of selling them for a profit in a short timeframe. This strategy requires diligent research into market trends, project roadmaps, and community engagement to identify undervalued assets. Any gains from these activities are subject to capital gains tax, and due to short holding periods, are often short-term capital gains, taxed at your ordinary income rate. Conversely, losses from NFT sales can be used to offset other gains, providing a potential tax relief strategy.

Certain NFTs offer utility or access that can translate into economic value. Some NFTs grant holders access to exclusive online communities, private events, or specialized content. While not a direct earning method, the demand for these utility-driven NFTs can increase their market value, allowing holders to sell them for a profit. Other NFTs may provide in-game benefits or serve as digital keys to unlock unique experiences within virtual environments, enhancing their desirability and potential for resale.

Earning Through Interactive Platforms

Interactive Web3 platforms, encompassing gaming, metaverses, and decentralized social media, offer users novel ways to earn digital assets and cryptocurrency through active participation. Play-to-Earn (P2E) gaming allows users to earn cryptocurrency or NFTs by engaging in gameplay, such as winning battles, completing quests, or trading in-game assets. These earnings are taxable income at their fair market value when received. The specific tax treatment depends on whether the activity is classified as a hobby or a business.

Metaverse platforms provide opportunities to earn by acquiring, developing, and monetizing virtual land and experiences. Users can purchase digital land parcels within these virtual worlds and then develop them by building structures, hosting events, or creating interactive experiences. Earnings can be generated through renting out developed land, selling virtual goods, or charging admission fees for events. Income from these activities is treated as rental or business income, subject to income taxes. The sale of virtual land, considered a digital asset, is subject to capital gains tax.

Decentralized social media platforms are emerging as spaces where users can directly monetize their content and engagement. Unlike traditional social media, where platforms retain most of the revenue, these Web3 alternatives reward users with tokens for creating posts, curating content, or building communities. For example, users might earn tokens for receiving likes, shares, or for participating in platform governance. These token rewards are taxable income at their fair market value when received.

Earning Through Network Participation and Services

Engaging in the underlying infrastructure and service provision of Web3 networks presents another pathway to earning. Contributing to Decentralized Autonomous Organizations (DAOs) allows individuals to earn by participating in governance, completing specific tasks, or contributing to projects. DAOs are internet-native organizations governed by their members, through token-based voting. Earnings for contributions to DAOs are considered ordinary income.

Becoming a node operator or validator is a more technical method of earning, involving running specialized software to secure and maintain a blockchain network. Node operators ensure the integrity and availability of the network by storing a copy of the blockchain and validating transactions. Validators, particularly in proof-of-stake networks, lock up a certain amount of cryptocurrency to participate in the process of verifying new blocks and, in return, earn rewards for their service. Rewards from operating a node or acting as a validator are treated as ordinary income and are taxable at their fair market value when received.

For individuals with specialized skills, Web3-specific freelancing and services offer diverse earning opportunities. This can include smart contract development, auditing, community management for Web3 projects, or creating content such as articles, videos, or graphic designs tailored for the decentralized space. Income earned from these freelance services is subject to self-employment tax, which covers Social Security and Medicare contributions, in addition to regular income tax. Freelancers in Web3 are responsible for tracking their income and expenses and paying estimated quarterly taxes.