How to Give NFTs As a Gift

Non-fungible tokens (NFTs) have become a popular medium for digital art. People are literally bidding thousands to own these collectibles, and some are even selling for millions. If your loved ones are into digital art and cryptocurrencies and enticed by the possibility of striking it rich with a speculative investment, then gifting them non-fungible tokens could be a great option.

What Are NFTs?

An NFT is essentially a digital file that comes with ownership rights. Anything in digital format can qualify, including pieces of art, sports cards, memes, videos, and audios, and once “tokenized,” they can be bought and sold online.

If you’re new to all this, you might be wondering why people are spending thousands or even millions of dollars on files that they could probably quite easily view and download for free. The answer is exclusive ownership.

When you buy an NFT, you receive a digital token that functions as a certificate of ownership. This title is registered and stored on a shared ledger known as the blockchain, the record-keeping technology behind the Bitcoin network, so that everyone knows that you are the proprietor and have the right to sell the asset. A digital file can be easily and repeatedly duplicated. However, there is only one or a limited number of NFT versions of it.

It is only this year that the market for NFTs has lit up. In February 2021, the 2011 meme of a flying toaster pastry cat named Nyan Cat sold for 300 ETH. About a month later, a JPEG of Everydays—The First 5000 Days, a digital artwork created by Mike “Beeple” Winkelmann, fetched over $69 million at Christie’s.

It’s not just regular art that is “tokenized’ and sold for big bucks, either. In March 2021, Twitter CEO Jack Dorsey put up for auction an image of his first tweet as an NFT and ended up collecting more than $2.9 million for charity.

How to Gift an NFT

If you don’t already have an NFT collection to gift, then you’ll need to buy one. For non-cryptocurrency enthusiasts, this requires picking up a few key items first. Most NFT marketplaces only accept Ethereum, a digital coin, so you may have to purchase some of that virtual currency before bidding. You’ll also need a digital wallet to store NFTs and the cryptocurrency used to acquire them.

There are several NFT marketplaces online, and each functions slightly differently, including in terms of what assets they trade. Some sell a bit of everything, while others specialize in certain niches, such as sports and gaming.

Once you’ve found a suitable marketplace and obtained all the right tools to trade, it’s time to set up an account and start buying. NFT marketplaces operate similarly to eBay. Usually, there are auctions where the highest bidder wins, although some offer “buy now” options where NFTs are sold for a fixed price.

After you’ve made your purchase, the next step is to transfer the NFT to the person to whom you want to gift it. Many NFT marketplaces now offer this option, and it can usually be achieved with a few clicks of a button. Generally, you’ll need to select the item you want to gift, choose the option to transfer it, then key in the recipient’s wallet address.

NFT Tax Considerations

Gifts surpassing $16,000 in calendar year 2022, or $17,000 in 2023, are taxable events in the eyes of the Internal Revenue Service (IRS)—unless the recipient is your spouse. If you plan to be this generous and risk exceeding the lifetime gift tax exemption, then you might be hit with a hefty tax bill.

If that’s not an issue, then the only tax liability will lie with the recipient when they eventually decide to sell. NFTs, like stocks, are subject to capital gains taxes. So, for example, if you bought an NFT for $500 (your cost basis) and the recipient then sold it for $1,000, the donee would be taxed on a capital gain of $500.

Given the newness of NFT taxation, it’s probably a good idea to get in touch with a tax advisor before buying and gifting NFTs.

The Bottom Line

NFTs are digital collectibles that have become a popular form of investment or gifts. However, because they are based on blockchain networks, it is important to understand how the technology works before giving it away. Make sure that the recipient understands the security risks and costs associated with blockchain transactions so that they are able to enjoy your gift.