6 mins

How to earn money and save taxes from NFTs

Alene VonRueden
April 28, 2022

What is the hype around NFTs?

Non-fungible tokens, better known as NFTs, are rapidly becoming one of the most popular digital assets in the world. Not just celebrities, even leading product giants are jumping on the NFT bandwagon, launching their own version of NFTs.

The industries that NFTs have tapped into are also spreading far and wide. From sports to gaming and even real estate, you can buy NFTs that give you access to everything.

1. ESPN joins hands with Tom Brady’s Web3 brand Autograph for NFTs that feature the best of Tom Brady’s magazine issues over the years. This comes just in time with the release of Tom Brady’s Man in the Arena docu-series.

2. Axie-Infinity, one of the most popular gaming platforms, offers a unique-to-earn model where players can earn tokens by playing. The Axie NFTs offer exclusive access to some of the in-game features.

3. With the onset of the metaverse, people can now purchase digital land through NFTs.

4. Taking a step into the future, an AI NFT that users can talk to was also created. Named Alice, the iNFT learns and builds per personality by interacting with users.

5. Pringle’s new and unique flavour is their CryptoCrisps, and the 360 Lamborghini Aventador NFT collection by Cars NFT club is a nod in the direction of various brands creating their NFTs.

The purchase volume of NFTs has crossed $12.6 billion, with each NFT ranging from a few hundred all the way to millions of dollars. Creators and investors are both enjoying the NFT space.

However, with the recent taxes imposed on all virtual digital assets that encompass NFTs, investors are left to wonder if their NFTs will really give them good returns. 

7 Ways of Earning Money from NFTs?

  1. Create NFTs - If you have a creative bone in your body, you can create unique art, convert them into NFTs, market them strategically and sell the NFTs for a considerable value. From pixelated art to 3D art, all types of NFTs have been sold on the NFT marketplaces, giving creators a whole new platform to monetise their art.
  1. NFT Royalties - By setting up royalties on the NFTs, investors can continue to earn from the NFT as a percentage of every sale made. Since the entire process is automated through smart contracts, NFT royalties are also considered a safe source of earning passive income.
  1. Licensed Collectibles - Just like physical collectables hold a lot of value in the real world, special releases of licensed collectables increase in value, especially when they are rare. Popular NFT collections include sports NFTs as a result of their immense fan following.
  1. Trade NFTs - those who can’t create the NFTs themselves can always buy the NFTs for a cheaper value and sell them at a higher value. NFTs derive their value from their uniqueness. Investors often keep an eye out for potential unique NFTs that could end up being extremely popular, which will aid in driving up their value.
  1. Rent Out NFTs - convert your NFTs into a good source of passive income by renting them out. NFTs are governed by smart contracts, which makes them extremely secure. Therefore, offering your NFT out for rent while someone else uses it and, in turn, pays you a fixed amount as “rent” is a wonderful use of the NFTs that arent being used. Often, NFTs come with utilities. For example, some gaming NFTs offers free discounts and exclusive access to the game. If you’re not using these, you can rent them to someone who cannot purchase the entire NFT but offer a smaller amount to use it for a particular duration. 
  1. NFT Gaming - As mentioned previously, NFTs come with a lot of utilities. Gaming NFTs, in particular, are extremely popular as they offer in-game purchase discounts and exclusive access. When you purchase an in-game as NFTs, you can sell them for a higher value when the demand increases within the game.

How to save taxes while earning from NFTs?

Sell indirectly

Expenses incurred to create digital assets cannot be expensed off to lower the taxable income. Therefore, NFTs will be treated as an asset and taxed accordingly, even for creators. 30% on the full sale price will be taxable. Instead, NFTs creators can sell their designs to someone who will then create them and sell them as an NFT. This entirely changes the base asset being created. It now becomes the business income of the creator, and they can pay tax as per the slab rates. However, this removes the joy of owning an NFT and selling it at a premium amount.

There is no tax on holding.

As long as you don’t sell the NFT, you do not have to pay tax on it. This works in favour of those looking at NFTs as a long-term investment. However, while purchasing the NFT, you might have to pay the 1% TDS on every crypto transaction.

Enjoy the Utilities

Another benefit of holding the NFTs is that you can enjoy the utilities that come with the NFTs. Be it discounted tickets or exclusive access to club benefits, NFTs carry a lot of value than their price alone. You can enjoy these utilities tax-free!

Hold your Losses and Match them with your Profits.

Did you buy an NFT as an impulse purchase or out of peer pressure, and it is now giving you losses? Wait! This could actually help you. Losses on NFTs or cryptocurrencies cannot be set off against any other income as per recent tax regulations on virtual digital assets in India. Losses also cannot be carried forward to any other year. However, losses can be set off within the same head. This means any losses from your NFTs can be set off against the profits from cryptocurrencies or NFTs. Therefore, you can plan the sale of your loss-making NFT to line with a profitable sale of NFTs to reduce your tax burden.

Gift

Can’t decide on the right wedding gift for your friend? Gift them an NFT of any value. The transaction will be entirely tax-free for you since you gifted it on the occasion of someone’s wedding. The newly wedded couple will have a unique investment, and you would’ve saved up on the same boring gifts.

You can also gift NFTs up to a value of Rs. 50,000 to a close relative (as defined by the Tax Rules) for it to be tax-free for you. 

Key Takeaways

Taking 30% of the profits from NFTs seems to be a bit harsh, but the NFT and crypto space is still in its nascent phase, and some regulations might help curb any frauds that investors might fall trap to. Before investing in NFTs, be sure to do your research and opt for the most unique NFT that offers a host of utilities to its owners.

Stay tuned to learn more about crypto taxes, their implications and how to plan your investments better, keeping taxes in mind.

Have the tax calculations of crypto income got you worried? Track your investments with ease and generate detailed tax reports with the crypto tax calculator - KuberTax! 

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