How to Give NFTs as a Gift

Non-fungible tokens (NFTs) are a new breed of cryptocurrency. People are bidding thousands of dollars to acquire these collectibles, and some people are even selling for millions of dollars. Giving your loved ones an NFT as a gift might be an excellent choice if they’re into digital art and cryptocurrencies and intrigued by the prospect of making money on a speculative investment.

An NFT is a digital file with ownership rights. Digital media of all kinds, including works of art, sports cards, memes, videos, and audios, can qualify once they are tokenized.

People who purchase files containing intellectual property often wonder why individuals are willing to spend large sums of money on something they could theoretically find for free. However, the answer is simple: exclusive ownership.

When you obtain an NFT, you’ll get a digital token that represents ownership. This title is registered and kept on a public ledger called the blockchain, which underlies the Bitcoin network and serves as a record-keeping technology. Everyone knows that you are the owner and have the right to sell the thing since it is recorded on the blockchain. A digital file may be multiplied without difficulty or repetition. There are, however, only one or a limited number of NFT versions of it.

NFTs have only recently become popular this year. In February 2021, the meme of a flying toaster pastry cat named Nyan Cat sold for 300 ETH or an estimated $783,402. Then, in March, a JPEG of Everydays — The First 5000 Days, created by Mike “Beeple” Winkelmann was auctioned off by Christie’s and received over $69 million dollars.

Not just is the value of art being sold for large amounts of money on the blockchain, but it’s also including other forms of artistic expression. In March 2021, Twitter CEO Jack Dorsey offered up a picture from his first tweet as an NFT and ended up raising over $2.9 million for charity after it was “tokenized.”

If you want to gift an NFT collection, and don’t have one already, then you’ll need to purchase one. For those not familiar with cryptocurrency, this requires picking up a few items beforehand. The majority of NFT marketplaces only accept Ethereum as payment, which is a digital coin. You may therefore have to buy some virtual currency before participating in any bidding. Additionally, you’ll need a digital wallet to store your NFTs and the cryptocurrency used for acquiring them.

There are a number of NFT marketplaces on the internet, and each operates somewhat differently, with certain assets being traded. Some sell a little of everything, while others specialize in specific niches, such as sports and gaming.

After you’ve uncovered a reputable marketplace and procured the necessary tools to trade, it’s time to set up an account and begin buying. Most NFT marketplaces resemble eBay; there are typically auctions where bidding ends when the highest offer is made, although some have “buy now” choices instead where NFTs go for a steady price.

After you’ve made your purchase, the next step is to send the NFT to the individual you want to give it to. Many NFT marketplaces now enable this feature, and it may usually be done with a few clicks of a button. You must typically choose the thing you wish to gift, select the option to transfer it, then input the recipient’s wallet address.

In the eyes of the IRS, any gifts worth more than $16,000 (or $32,000 if given by a couple), regardless of whether they are made in person or through a will, are taxable events. Unless the receiver is your spouse, any gifts valued at more than $16,000 ($32,000 if given by a couple)are taxable events. You might be charged with a considerable tax fee if you plan to be this generous and risk breaching the lifetime gift tax exemption.

The only taxes associated with this NFT would be capital gains when the recipient sells it. For example, if they bought the NFT from you for $500 (your cost basis) and sold it later for $1,000, then they would pay taxes on a capital gain of $500.

There is no straightforward answer to how much tax you would pay. NFTs are a relatively new concept that the IRS hasn’t fully addressed yet, leaving them in limbo 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 the IRS defines as “any work of art” and are taxed at a higher rate of 28%.

There are also the cryptocurrencies used to acquire NFTs that should be considered. These digital currencies are known to fluctuate in value, and every time one is sold for more or less than it was purchased for, a taxable event occurs.

With the multiple layers of complication involved with NFTs, it’s best to consult a tax advisor before making any purchases or gifts.