Non-fungible tokens, or NFTs, have become a multi-billion dollar sensation over the past couple of years. They provide owners with a unique avatar and exclusive access to everything from metaverses to in-person events worldwide. However, it's still a challenge for non-crypto savvy individuals to purchase and use NFTs.
Let's take a look at how to set up a Web3 wallet, fund the wallet, choose an NFT marketplace, and purchase your first NFT.
NFTs have become incredibly popular over the past couple of years, but they're still tricky for non-crypto savvy individuals to purchase. Here's how to do it!
Step 1: Setup a Web3 Wallet
A crypto wallet is a place where you can securely store cryptocurrencies, including non-fungible tokens. While many crypto traders and investors keep their holdings on exchanges, most NFTs are kept in self-custody—or non-custodial—wallets that don't rely on a third-party custodian.
MetaMask is one of the most popular and easy-to-use non-custodial wallets. You can install and use the wallet on browsers like Chrome or Firefox and on iOS or Android devices. After installing MetaMask, you can establish wallet addresses on various blockchains.
You can also use wallets like Coinbase Wallet, Binance’s Trust Wallet, AlphaWallet or Math Wallet. Each of these options has its own pros and cons, such as Math Wallet’s support for 70+ blockchains and Coinbase Wallet’s integration with the Coinbase exchange.
Step 2: Choose an NFT Marketplace
Most NFTs sell on a marketplace. OpenSea is the most popular for art, music, games, and other NFTs, but you may also want to consider marketplaces focused on specific niches. For instance, SuperRare features the rarest art NFTs in the world.
Each NFT is available on a specific blockchain. Ethereum is the most popular blockchain for NFTs. However, competitors aim to offer lower gas fees, faster transaction times, simpler workflows, and less environmental impact, making them potential alternatives.
Flow, a blockchain built by Dapper Labs, the creator of CryptoKitties, is one of the most promising Ethereum competitors for NFTs. With its high performance and low gas fees, the platform has already become home to marketplaces like NBA Top Shot.
Step 3: Fund Your Wallet
A crypto wallet like MetaMask enables you to receive free NFTs through airdrops, but you will need to fund the wallet to buy NFTs. Fortunately, MetaMask makes it easy to buy, send, or swap crypto using various services, depending on the blockchain network.
After opening MetaMask and selecting a blockchain network, you will see an option to "Buy" cryptocurrency on that network. Then, you will see various deposit options depending on the network. For example, you can buy ETH through Wyre using a debit card.
In some cases, it may require several transactions to fund a wallet. For example, you may need to purchase Polygon’s tokens, POLY, on an exchange and then import the tokens into your MetaMask wallet before you can use it to purchase an NFT.
Step 4: Find the Right NFT
OpenSea alone has over 1.25 million users, two million collections, and 80 million NFTs. There are options for collectors with any budget, from $100,000+ Bored Apes to $5.00 Robotars. And if art isn't your thing, you can buy virtual real estate NFTs on platforms like Decentraland.
You can find up-and-coming NFTs using tools like NonFungible.com, which tracks the 7-day volume for various NFT projects and identifies those experiencing the fastest growth. Or, you can look for projects using platform tools on OpenSea.
Another common approach involves using tools to track "crypto whales"—or crypto wallet addresses with millions of dollars worth of funds. These individuals can influence markets, making their NFT purchases potential leading indicators.
Step 5: Purchase the NFT
The purchase process involves a few steps. First, you must connect your wallet with the NFT marketplace. Then, you can initiate a transaction to purchase (or bid on) an NFT. As part of that process, you will have to agree to the gas fees and wait for the transaction to complete.
Depending on the platform, you may also owe gas fees when bidding for items. In the case of Ethereum-based platforms, that means you could be paying tens or hundreds of dollars to place a bid that you won’t get back if you don’t win the item.
Once you purchase the NFT, you may want to consider transferring it to a hardware wallet, like a Trezor or Ledger, for safekeeping. MetaMask wallets could be risky since they live on a browser where they could be susceptible to phishing or other cyber attacks.
What Happens Next?
Most NFTs are digital pieces of art or collectibles used as avatars. After purchasing NFTs, most people use them as their digital avatar by downloading the image and uploading it to Facebook, Twitter, or other social media or metaverse accounts.
If you have a valuable NFT, several new platforms make it easy to stake your NFT and generate a passive income. For example, NFTX makes it easy to create ERC20 tokens backed by NFT collections at a 1:1 ratio. The resulting vTokens can be staked for yield rewards.
Game-based NFTs can also be monetized by renting out the items or players to others. For instance, Axie Infinity players regularly rent out their Axies to other players. As they generate income through gameplay, the owners receive a cut of the proceeds.
Tips to Keep in Mind
- Purchasing an NFT could trigger a taxable event since you need to sell Ethereum or another cryptocurrency to buy the NFT. Upon that sale, you will owe any eligible capital gains tax on the cryptocurrency.
- Creating and selling NFTs could trigger ordinary income tax at your marginal tax rate. In addition, you could owe capital gains tax upon selling the proceeds for U.S. dollars.
- NFTs, like any other cryptocurrency, are not recoverable if you lose access to your wallet. Therefore, it's essential to keep your wallet safe and consider using a hardware wallet like Ledger.
The Bottom Line
Non-fungible tokens, or NFTs, have become a core fixture of the crypto and Web3 industry. In the future, they could power everything from avatars in the metaverse to fractional ownership of real estate. While buying NFTs is a complex process, new platforms promise to make it easier over time and unlock the benefits for everyone.
If you buy and sell NFTs, ZenLedger can help you calculate and pay taxes to avoid any problems with the IRS. Sign up today!