What are 'royalties' on NFT sales? Who gets that money when I sell my NFT?

Understanding Royalties in the NFT Ecosystem

1. Royalties refer to a predetermined percentage of the sale price that flows automatically to the original creator each time an NFT is resold on a secondary marketplace.

2. These payments are enforced through smart contracts deployed on blockchains like Ethereum, Solana, or Polygon at the time of minting.

3. The royalty rate is typically set by the creator before the NFT collection launches and can range from 2% to 10%, though some platforms allow up to 25%.

4. Unlike traditional art markets, where resale rights rarely benefit creators, NFT royalties introduce a structural mechanism for ongoing compensation.

5. Not all marketplaces honor royalties equally—some enforce them strictly, while others have disabled support due to protocol-level limitations or governance decisions.

Who Receives Royalty Payments?

1. The wallet address specified during contract deployment receives all royalty payouts unless modified via upgradeable contract logic.

2. In most cases, this is the creator’s personal or project treasury wallet, verified at mint time and immutable thereafter on non-upgradeable contracts.

3. If multiple contributors collaborated on the artwork or code, royalties may be split using multi-signature wallets or decentralized autonomous organization (DAO) treasuries.

4. Some collections implement dynamic royalty routing, directing portions to community funds, charity addresses, or staking reward pools based on predefined conditions.

5. Third-party services like Manifold or Zora enable creators to update royalty recipients post-deployment, offering flexibility not available on standard ERC-721 contracts.

Technical Enforcement and Limitations

1. On Ethereum, royalties rely on the EIP-2981 standard, which allows contracts to declare royalty information and recipient addresses in a standardized way.

2. Wallets and marketplaces must explicitly integrate EIP-2981 to trigger royalty transfers; absence of integration means no automatic payout occurs.

3. Certain layer-2 solutions and newer chains lack widespread EIP-2981 adoption, resulting in inconsistent royalty enforcement across ecosystems.

4. Flash loans and sandwich attacks have been used to bypass royalty logic in poorly audited contracts, exposing vulnerabilities in custom royalty implementations.

5. Marketplaces such as Blur and OpenSea have shifted toward optional or off-chain royalty handling, reducing guaranteed income for creators despite on-chain contract specifications.

Legal and Tax Implications of Royalty Income

1. Royalty earnings are treated as taxable income in jurisdictions including the United States, United Kingdom, and Germany, with valuation determined at the time of receipt in cryptocurrency.

2. Creators must track every secondary sale involving their NFTs using blockchain explorers or dedicated analytics tools like Rarity Sniper or Dune dashboards.

3. Cross-border royalty flows may trigger withholding tax obligations depending on the residency of the recipient and applicable double taxation treaties.

4. Smart contract-based royalties do not constitute legal contracts under most civil law systems, meaning enforcement outside the blockchain relies on jurisdiction-specific intellectual property frameworks.

5. Some creators assign royalty rights to entities like LLCs or foundations to manage liability, reporting, and distribution—especially when operating globally.

Frequently Asked Questions

Q: Do I get royalties if my NFT is sold peer-to-peer without a marketplace? A: Only if the buyer and seller use a wallet or tool that respects EIP-2981 and manually triggers the royalty transfer function. Most P2P transfers skip this step entirely.

Q: Can I change my royalty percentage after my NFT collection is live? A: Not on standard ERC-721 contracts. Upgradeable contracts or platforms like Manifold permit updates, but require explicit design choices made before launch.

Q: Are royalties paid in ETH, SOL, or the native token of the chain where the sale occurs? A: Royalties are paid in the same token used for the sale—whether it’s ETH on Ethereum, SOL on Solana, or USDC on Arbitrum—unless the contract enforces a specific denomination.

Q: What happens to royalties if the original creator’s wallet is lost or compromised? A: Funds continue routing to that address. Recovery depends solely on private key access or multisig governance rules—not on identity verification or centralized intervention.