Non-fungible tokens (NFTs) are all the rage these days. 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 an NFT could be a great option.
- Non-fungible tokens (NFTs) are stored in a digital wallet and usually paid for with a cryptocurrency—primarily Ethereum.
- NFT marketplaces operate auctions or the option to buy at a fixed price, similar to eBay.
- The Internal Revenue Service (IRS) has yet to issue any specific guidance on NFTs, making these digital assets complex from a tax perspective.
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 or an estimated $783,402. 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.
NFTs are highly speculative investments, with their value being based entirely on what someone else is willing to pay for them.
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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.
NFT recipients need a wallet to store them, while you, the donor, will probably need to stock up on Ethereum, as the majority of NFT marketplaces only accept this virtual currency as a form of payment.
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.
When gifting an NFT, make sure that you input the recipient’s wallet address correctly. This is a blockchain transaction, meaning that the transfer is irreversible and carries a gas fee—a payment made to compensate for the computing energy required to process and validate transactions on the Ethereum blockchain.
NFT Tax Considerations
Gifts surpassing $16,000, or $32,000 if made by a couple, 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, which as of 2021 is set at $11.7 million, 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.
How much tax you would pay isn’t cut and dried. NFTs are a relatively new phenomenon that the IRS hasn’t fully addressed, leaving them somewhere between cryptocurrencies, which are taxed as property with a long-term capital gains tax rate that varies from 0% to 20% based on income, and collectibles, which are defined by the IRS as “any work of art” and taxed at a higher rate of 28%.
If that headache wasn’t big enough, there are also the cryptocurrencies used to buy NFTs to consider. These virtual currencies are known to fluctuate in value, and every time one is disposed of for more or for less than it was bought for, it triggers a taxable event.
Given these various complexities, it’s probably a good idea to get in touch with a tax advisor before buying and gifting NFTs.
What does NFT stand for?
NFT is short for non-fungible token. If someone describes an item as non-fungible, what they mean is that it is unique and cannot be easily traded with something else. Fungible items can be exchanged for another good or asset of the same value, such as swapping one $10 note for two $5 notes. Non-fungibles don’t work this way, as each one is different.
How do I send someone an NFT?
Once you are equipped with all the necessary materials, including an NFT to gift and a wallet address to send it to, the process of making a transfer is usually quite simple. Generally, it involves opening the account where the NFT is held, locating the NFT, selecting the option to transfer it, then keying in the recipient’s wallet address.
How much does it cost to transfer an NFT?
On most platforms, every time you send an NFT to someone else, you will be charged a “gas fee.” These fees cover the computational expenses of processing and validating the transfer. You should pay careful attention to these fees, as they can be high and eat into your profits.
Gas fees are known to fluctuate, so it’s wise not to wait until the last minute to make a transfer. Keeping tabs on fees until an opportune moment arrives could help to cut your expenses considerably. Transaction costs often have a tendency to drop over the weekend, and you may end up paying less if you opt for a slower transfer.