What Are NFT Royalties & How Do They Work?

Key Takeaways

• NFT royalties are a solid way for artists to earn passive income
• They are set during the minting stage
• NFT royalty percentages are generally between 2-10%
• Some marketplaces have royalty fees lower than 1%. Some have none

What Are NFT Royalties?

Non-fungible token (NFT) royalties, or NFT royalties, are fees that are paid to the original creator of the NFT in exchange for the use of that creator’s property. In other words, it’s a way for the NFT artist to bring in money after the initial sale, paid for by the buyer. Pretty sweet deal for the artist as it can result in a potentially never-ending stream of income off the back of a single digital asset. For the top NFT collections, this means millions.

To give a real-world analogy, imagine you write an absolute banger of a song. You record it, produce it, and sell it to a major label. You receive a windfall of cash for your genius. Because it’s so good, the major label promotes it everywhere. The track receives significant airtime and is sold to Google because they want to use it in a commercial. You get paidevery time your track is sold or played.

To make it even simpler, it’s like winning the lottery and being given the option of taking an initial lump sum or a payout over time—and choosing both.

How Do NFT Royalty Fees Work?

How Are NFT Royalty Percentages Added?

How Royalties Are Calculated

Since the smart contract says how much the artist will be receiving as a percentage of the sale, it’s super simple how NFT royalties are calculated. In some of the most basic math ever, when a sale occurs, the percentage is taken from the sale.

If the artist mints their NFT with a royalty percentage of 5%, and the NFT sells for 3 ETH, you would calculate what 5% of 3 ETH is, which is 0.15 ETH.

3 x0.05 =0.15.

That’s the artist’s royalty, which is sent to their wallet when the NFT is sold.

NFT Royalty Fee Example

Here’s a more thorough example: Jack the Artist mints an NFT on Blur (nice). When Jack mints it, he adds a custom contract with a0.5% royalty fee because Jack isn’t greedy and that’s the minimum anyway. Jack the Artist mints a pretty rad NFT titled “Jack the Artist.” It sells nearly immediately for a wonderful12 ETH. Classic Jack.

Before Jack the Artist gets paid for “Jack the Artist,” the marketplace registers the sale. Since Blur offers no-fee trading (as a way to lure traders away from OpenSea), the chain reserves Jack’s royalty from the sale price. Remember, that’s0.5% of12 ETH. So using the same math as above:

12 x0.005 =0.06 ETH. Jack just made0.06 ETH, deposited right into his specified wallet. Nice.

Benefits Of Royalties For Creators

The only real drawback to creators is when they choose too high a percentage and may lose a buyer because of it.

Benefits include:

• Income every time their work is sold
• Which translates into long-term passive income
• Which allows the artist to continue minting new pieces
• While developing a record of income production

NFT royalties can be a major source of income for artists and should be implemented in a strategic way when it makes sense, which is often.

List Of NFT Marketplaces With Royalties

Royalties are great—but not every marketplace has them. That’s unfortunate for the seller as it favors the buyer, and is clearly the marketplace favoring traders over artists. However, there’s been a move to enact minimum royalty fees, which is cool. Here’s a list of marketplaces still using royalty fees, and whether or not they enforce them:

1. OpenSea

• Currently no fees
• Optional creator earnings: 0.5% minimum
• Not enforcedif tradable on Blur.
• Enforced fully if not also trading on Blur.

2. Blur

• Currently no fees
• Minimum 0.5% royalty
• Enforced fullyif not also trading on OpenSea.
• Enforced minimum 0.5% if also tradable on OpenSea.

These are the two largest exchanges and, as you canclearly see, hate each other. Some other marketplaces include:

3. Rarible

• 1% taken from both the buyer and seller side of a transaction
• Enforced through aggregation from other marketplaces and Rarible’s community marketplaces.

4. SuperRare

• Primary sales have a 15% fee taken from the artist's payout
• Secondary sales take 10%
• All sales take 3% as a marketplace fee, paid for by the buyer
• Enforced fully.

5. Magic Eden

• Flat 2% transaction fee
• Enforced fully.

Optional royalty fees exist when a marketplace leaves it up to the buyer whether they will honor the royalty fee. As you can guess, many buyers won’t honor the fee, and this leaves the artist in the lurch. The implementation of optional fees increases liquidity for sure, but it isn’t exactly enticing as a seller to list your NFT on a marketplace that won’t back you up.

NFT Royalties Laws & Taxes

NFT royalties provide ongoing income for artists with every new sale. Income is the key word here. That means NFT royalties are taxable as ordinary income (reported on Schedule E). Depending on your tax bracket, you might pay up to 37% in federal income taxes if you had a great year, or a lesser percentage if your total income was lower.

The initial sale of the NFT works differently, however, and the tax treatment depends on whether you’re a hobbyist or you sell NFTs as a business.

• As anNFT hobbyist, your crypto minting costs become your cost basis. When you sell the NFT the profit between your cost basis and the sales price is taxed as capital gains.
• Whenselling NFTs as a business, sales of NFTs you minted are treated as ordinary income, just like if you sold any other type of artwork you create. (NFTs you buy from others and then sell become capital gains or losses.)

To Sum It Up

NFT royalties are an elegant way for artists to get paid every time their art is sold, provided it’s done so on an exchange that enforces royalties. The calculations are performed within smart contracts and result in a payout to the artist’s wallet once their NFT experiences a secondary sale. However, with the recent “race-to-the-bottom” mentality of marketplaces slashing fees for creators, royalty payment percentages are diminishing at an alarming rate.

Frequently Asked Questions