How to Make Money With NFTs as a Beginner

Non-fungible tokens, or NFTs, represent unique digital assets stored on a blockchain, a distributed public ledger. Unlike cryptocurrencies, which are interchangeable, each NFT possesses distinct characteristics and cannot be replicated. These digital assets can encompass a wide range of items, including digital art, music, collectibles, and virtual real estate.

Preparing for NFT Transactions

Before engaging in any NFT-related activities, setting up a cryptocurrency wallet is a first step. A crypto wallet stores cryptocurrencies and NFTs, facilitating blockchain transactions. Non-custodial wallets, where you control private keys and seed phrase, offer greater security and autonomy over your assets. Custodial wallets, managed by a third party, provide convenience but require trust in the provider to secure your assets.

Acquiring cryptocurrency is also necessary to purchase NFTs and cover fees. Common cryptocurrencies like Ethereum (ETH) or Solana (SOL) are used in the NFT ecosystem. These can be obtained through centralized cryptocurrency exchanges, which allow users to convert fiat currency into crypto via bank transfers or debit card payments. Exchanges require identity verification (KYC and AML checks) to comply with financial regulations.

Understanding blockchain technology is beneficial for navigating NFT transactions. Blockchain verifies ownership and records transactions securely and transparently. Blockchain transactions involve “gas fees,” payments to network validators for processing and validating transactions. Fees fluctuate based on network congestion and complexity, and for tax purposes, are considered part of the NFT’s cost basis.

Creating and Selling Your Own NFTs

Creating and selling your own NFTs starts with unique digital assets appealing to buyers. This includes digital art, photographs, music, 3D models, or animated graphics. Ensure files are high-quality and in appropriate formats (JPG, PNG, GIF, or MP4) for presentation. Creators must possess intellectual property rights for the content.

Selecting an appropriate blockchain and marketplace is the next decision. Different blockchains, like Ethereum, Polygon, or Solana, have varying speeds and fees. Polygon often has lower gas fees than Ethereum, which has wider adoption. Marketplaces like OpenSea or Rarible cater to different creators and collectors, varying in user experience, supported cryptocurrencies, and community size.

Minting an NFT transforms your digital file into a unique, verifiable token on the chosen blockchain. During minting, upload the digital asset and embed metadata like title, description, and properties. Many platforms allow creators to set a royalty percentage (typically 5-10%), ensuring they receive a portion of the sale price each time their NFT is resold on a secondary market. Minting incurs a gas fee, included in the NFT’s cost basis for tax purposes. Royalties received are generally considered ordinary income.

After minting, list your NFT for sale on the chosen marketplace. Creators can opt for a fixed price or an auction format. Marketplaces typically charge a commission (2.5-15%) on successful sales, in addition to any initial listing fees. Income from NFT sales is generally subject to capital gains tax if held as an investment, or ordinary income tax if created and sold as a regular business activity. Maintaining meticulous records of creation costs, gas fees, and sale proceeds is important for accurate tax reporting.

Promoting your newly minted NFTs attracts buyers and generates interest. Engaging with online communities on social media platforms like X (formerly Twitter) or Discord increases visibility. Building a strong community fosters demand and establishes your reputation as a creator. Participation also provides insights into market trends and collector preferences.

Buying and Reselling NFTs

Buying and reselling NFTs for profit requires diligent research and an understanding of market dynamics to identify potentially valuable assets. Researching NFT projects involves evaluating rarity, community strength, and utility (e.g., access to exclusive content or events). Analyzing past sales data, “floor prices” (the lowest price for an NFT in a collection), and the project’s roadmap provides insights into long-term potential. Understanding the team and their track record is also part of due diligence.

Acquiring NFTs typically occurs on marketplaces through either direct purchase or participation in auctions. Direct purchase involves buying an NFT at a set price, while auctions allow for competitive bidding. When participating in auctions, some platforms may charge gas fees for placing or canceling bids, adding to the transaction cost. Ensure sufficient cryptocurrency in your wallet to cover the NFT price and associated gas fees before initiating a purchase.

Once an NFT is acquired, monitoring its value and participating in the project’s community can be beneficial. Joining official Discord servers or social media groups provides access to updates, announcements, and discussions that might impact the NFT’s value. Some NFTs may offer passive benefits, such as staking or eligibility for future airdrops, which can enhance their value. Assessing market sentiment and price fluctuations is part of managing your NFT portfolio.

Selling an acquired NFT for profit involves listing it on a marketplace, similar to how creators list their original works. Set a new price, fixed or through an auction, aiming to sell it for more than your initial acquisition cost. Marketplaces charge a sales commission and potentially gas fees for transferring the NFT to the buyer. Gain or loss from the sale is calculated as the difference between the sale price (minus selling fees) and the original purchase price (plus acquisition costs).

For tax purposes, the classification of gains or losses on NFT resales depends on the holding period. If held for less than one year, profit is generally considered a short-term capital gain and taxed at your ordinary income tax rate. If held for more than one year, profit is treated as a long-term capital gain, typically subject to lower tax rates (e.g., 0%, 15%, or 20%). Accurate record-keeping of purchase prices, selling prices, and associated fees is important for tax compliance and calculating your cost basis.

Exploring Other NFT Earning Methods

Beyond creating and reselling, other avenues exist for generating income with NFTs. Play-to-earn (P2E) gaming is a method where players can earn cryptocurrency or NFTs through gameplay. These earned digital assets (e.g., in-game items, characters, or virtual land) can then be sold on secondary marketplaces. Income from P2E activities is generally considered ordinary income for tax purposes.

NFT staking presents another earning opportunity, where owners can “lock up” certain NFTs within a decentralized finance (DeFi) protocol to earn rewards. This is similar to staking cryptocurrencies, where users contribute to network security or liquidity for passive income, often in native tokens. Rewards from NFT staking are typically taxed as ordinary income at the time of receipt.

Renting NFTs is an emerging method that allows owners to temporarily lease their digital assets to others for a fee. This is relevant for in-game assets, metaverse land, or utility-based NFTs that provide specific access or benefits. The renter gains temporary use of the NFT’s utility, and the owner generates rental income. Similar to traditional rental income, earnings from renting NFTs are generally classified as ordinary income for tax purposes.