How to Make Money With NFTs: Trading, Minting & Gaming

Non-fungible tokens, often referred to as NFTs, represent unique digital identifiers recorded on a blockchain. These digital assets certify ownership and authenticity, making them distinct from fungible assets like traditional currencies or cryptocurrencies, which are interchangeable. NFTs typically link to various digital files, including art, music, videos, or collectibles, establishing a verifiable record of their existence and ownership. This uniqueness opens several avenues for individuals to generate income within the digital economy.

Trading Digital Collectibles

Engaging in the trading of digital collectibles involves acquiring existing NFTs with the intention of selling them later for a profit. Research and identification of NFTs holding potential value is crucial. This involves analyzing factors such as rarity, community engagement, creator reputation, and the project’s long-term roadmap. Understanding broader market trends and previous sales data is also important for informed decision-making.

To acquire NFTs, setting up a compatible cryptocurrency wallet, such as MetaMask, is necessary to store digital assets and interact with marketplaces. Individuals must obtain the required cryptocurrency, often Ethereum or Solana, from a reputable exchange and transfer it to their digital wallet. Navigating various NFT marketplaces, including platforms like OpenSea or Magic Eden, allows users to browse and purchase digital collectibles.

When selling an NFT, connect the digital wallet to the chosen marketplace and list the asset for sale. Sellers can choose between a fixed price or an auction format. Account for marketplace fees, which commonly range from 1% to 5% of the sale price, and network transaction fees, often called “gas fees.”

Selling NFTs is generally treated as a taxable event by the Internal Revenue Service (IRS). Profit from the sale is typically considered a capital gain. If an NFT is held for one year or less, the gain is a short-term capital gain, taxed at ordinary income rates. If held for more than one year, it’s a long-term capital gain, subject to lower rates. Transaction fees incurred can reduce the cost basis, lowering the taxable gain.

Minting Your Own NFTs

Creating and selling original NFTs begins with conceptualizing and developing the digital asset itself. This can involve various forms of digital content, such as digital art, music, videos, or unique collectibles. Artists and creators utilize digital tools to produce these assets, transforming their creative vision into a digital format suitable for tokenization.

The process of transforming a digital asset into an NFT is known as “minting.” This involves selecting a blockchain network, such as Ethereum, Polygon, or Solana, each with its own implications for transaction costs and ecosystem compatibility. Ethereum is widely used but can have higher gas fees, while Solana typically has much lower fees.

After choosing a blockchain, creators select an NFT minting platform or marketplace that supports the creation process, such as OpenSea, Rarible, or Foundation. On these platforms, the digital asset is uploaded, and essential metadata is added. Creators can set royalty percentages, which are embedded into the NFT’s smart contract, allowing the original creator to earn a percentage of the sale price each time their NFT is resold. This provides a potential source of passive income.

Minting an NFT generally incurs fees, primarily gas fees, paid to the blockchain network. Some platforms offer “lazy minting,” where gas fees are deferred until the NFT is sold, shifting the cost to the buyer. For tax purposes, minting costs, including gas fees, can be considered part of the asset’s basis. Royalties received from secondary sales are generally treated as ordinary income by the IRS.

Earning through NFT-Powered Gaming

Blockchain-based games that integrate NFTs offer players an opportunity to earn tangible value through their participation, a model commonly known as play-to-earn (P2E). This allows players to acquire digital assets that hold real-world value, moving beyond traditional gaming where in-game items typically have no external monetary worth.

Players can monetize their time and effort by earning in-game NFTs, which can include unique characters, virtual items, or digital land plots. Many NFT-powered games also distribute specific cryptocurrency tokens, which players earn through gameplay.

Once acquired, these in-game NFTs or cryptocurrency tokens can be converted into real-world value. In-game NFTs can be sold on dedicated game marketplaces or broader NFT platforms. Earned game-specific tokens can be traded on cryptocurrency exchanges for other cryptocurrencies or fiat currency. Some games also provide options for passive income, such as by staking or lending their in-game assets.

For tax purposes, cryptocurrency tokens or NFTs earned through play-to-earn gaming are generally considered ordinary income by the IRS at their fair market value at the time of receipt. Subsequent sales of these earned NFTs are then subject to capital gains tax, calculated based on the difference between the sale price and the fair market value at the time the NFT was originally received. Maintaining detailed records of the date and fair market value of all earned assets is important for accurate tax reporting.