Non-fungible tokens (NFTs) have become a popular medium for digital art. People have literally bid thousands to own these collectibles, and some have even sold for millions.
If your loved ones are into digital art and cryptocurrencies and are enticed by the possibility of striking it rich with a speculative investment, then gifting them NFTs could be a great option.
Key Takeaways
- Non-fungible tokens (NFTs) are stored in a digital wallet and usually paid for with a cryptocurrency.
- NFT marketplaces operate auctions or the option to buy at a fixed price, similar to eBay.
- The Internal Revenue Service (IRS) has not yet issued official rules on NFTs, making these digital assets complex from a tax perspective.
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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 audio, and once “tokenized,” they can be bought and sold online.
If you’re new to all this, you might wonder why people spend 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 everyone knows you are the proprietor and have the right to sell the asset. A digital file can be easily and repeatedly duplicated (it is fungible). However, there is only one or a limited number of NFT versions of it (thus, it is non-fungible).
In February 2021, the 2011 meme of a flying toaster pastry cat named “Nyan Cat” sold for 300 Ether (ETH). About a month later, a JPEG of “Everydays: The First 5000 Days,” a digital artwork created by Mike “Beeple” Winkelmann, fetched over$69 millionat Christie’s.
It’s not just regular art that is “tokenized” and sold for big bucks, either. In March 2021, Jack Dorsey (CEO of then-Twitter, now X) 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.
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. Some NFT marketplaces now accept credit and debit cards in addition to cryptocurrency, but not all do. You’ll also need a digital wallet to store NFTs and your cryptocurrency.
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, and 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 transaction fee—a payment made to compensate for the computing energy required to process and validate transactions on the blockchain.
NFT Tax Considerations
Gifts surpassing $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, you might be hit with a hefty tax bill—although, in 2023 and 2024, you would need to have gifted more than $12.5 million in your life to trigger this tax.
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 (at least until the IRS publishes its official guidance on digital asset taxes). So, for example, if you bought an NFT for $500 (your cost basis) and gave it to your child, who then sold it for $1,000, your child would be taxed on a capital gain of $500.
Given the newness of NFT taxation, it’s probably a good idea to contact 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, they mean 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—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, 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, and then keying in the recipient’s wallet address.
How Much Does It Cost to Transfer an NFT?
On most platforms, you will be charged a transaction fee every time you send an NFT to someone else. 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.
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 can enjoy your gift.
The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read ourwarranty and liability disclaimerfor more info. As of the date this article was written, the author does not own non-fungible tokens.
