How to Make Money With NFTs: Create, Trade & Earn

Non-fungible tokens, often called NFTs, represent unique digital assets recorded on a blockchain. These digital items, which can range from art and music to collectibles and virtual real estate, derive their value from their verifiable scarcity and ownership, secured by the underlying blockchain technology. Unlike traditional cryptocurrencies, which are interchangeable, each NFT possesses distinct characteristics that make it one-of-a-kind. The growing interest in digital ownership has opened various avenues for individuals to generate income through these unique digital assets.

Creating and Selling Your Own NFTs

Generating income by creating and minting original NFTs involves a structured process. Creators might develop digital art, compose music, design virtual fashion, or craft unique in-game items. The creative process culminates in a digital file ready for transformation into an NFT.

Once the digital asset is prepared, “minting” it on a blockchain is required. This involves selecting a suitable blockchain, such as Ethereum or Polygon, widely used for NFT transactions. Creators then choose an NFT marketplace, like OpenSea or Rarible, to list and sell their minted assets. Setting up a compatible cryptocurrency wallet, such as MetaMask, is a prerequisite to interact with these platforms.

Minting an NFT incurs “gas fees,” which are transaction costs paid to the blockchain network for processing and validating the creation. These fees can fluctuate based on network congestion. The cost of minting, along with other direct expenses, forms part of the NFT’s cost basis.

Pricing an NFT strategically involves considering factors such as the artist’s reputation, the rarity and perceived value of the asset, and current market demand. Marketing efforts are essential, ranging from promoting the NFT on social media platforms to engaging with online communities. When an NFT sells, the income generated is considered ordinary income for creators who regularly engage in such activities with a profit motive. This income is subject to federal income tax and potentially self-employment tax.

Buying and Trading Existing NFTs

Profiting from existing NFTs involves “flipping,” where individuals acquire assets with the intent to resell them for a higher price. This speculative approach requires understanding market dynamics, including market research to identify trends and assess rarity and demand. Analyzing past sales data, community sentiment, and creator reputation can inform purchasing decisions.

Trading strategies vary. Some participants acquire NFTs during primary “drops” or initial sales, hoping for rapid price appreciation. Others seek undervalued assets on secondary marketplaces, aiming to capitalize on price discrepancies or anticipated future growth. Successful trading depends on timing purchases and sales, requiring constant monitoring of market sentiment and analytical tools to track floor prices and trading volumes.

When buying an NFT with cryptocurrency, the transaction is a taxable event for the cryptocurrency used, potentially triggering a capital gain or loss. The cost basis of the acquired NFT includes its purchase price and any associated transaction fees. Upon reselling an NFT, any profit is subject to capital gains tax. If held for one year or less, the gain is short-term and taxed at ordinary income rates. For NFTs held longer than one year, the gain is long-term and taxed at lower rates. Gains and losses from NFT sales must be reported on IRS Form 8949 and Schedule D.

Earning Through NFT Utility and Ecosystems

NFTs offer several avenues for generating passive or active income through their utility within various ecosystems. These methods leverage the inherent properties of NFTs to create ongoing value for holders. Understanding these mechanisms helps manage NFT portfolios.

Play-to-Earn (P2E) Gaming

Play-to-Earn (P2E) gaming integrates NFTs as in-game assets, allowing players to earn cryptocurrency or digital items by participating in gameplay. These assets might include unique characters, virtual land, or equipment. Players can then sell these earned NFTs or cryptocurrencies on marketplaces, converting gaming efforts into tangible value. Income from P2E games, whether tokens or NFTs, is considered ordinary income at its fair market value when received. Subsequent sale of these earned assets triggers capital gains or losses.

NFT Staking

NFT staking offers another income-generating opportunity, similar to staking traditional cryptocurrencies. Owners can “lock up” their NFTs within a protocol to support network operations or provide liquidity, receiving rewards. These rewards are distributed in cryptocurrency or additional NFTs. The value of these staking rewards is taxable as ordinary income at their fair market value. Subsequent sales of received rewards are subject to capital gains tax.

NFT Renting and Lending Platforms

NFT renting and lending platforms enable owners to temporarily lease their digital assets to other users for a fee. This is common for valuable in-game assets or virtual land, which can be rented to players without outright purchase. Rental income from these activities is considered ordinary income and is subject to federal income tax. This provides a consistent income stream for NFT holders without requiring them to sell their underlying assets.

NFT Royalties

NFT creators can establish royalty mechanisms programmed directly into their NFTs’ smart contracts. This allows them to receive a percentage of the sales price each time their NFT is resold on a secondary marketplace. These royalties provide an ongoing income stream from their original creations. Royalty income is treated as ordinary income and is subject to federal income tax, along with potential self-employment tax if NFT creation is a professional activity. Maintaining comprehensive records of all income streams is essential for accurate tax compliance.