NFT Tax Loss Harvesting: How it Works, Reporting, & Tips

  • January 17, 2023
  • 2 Min Read

Key Takeaways

  • NFT tax loss harvesting is the practice of selling NFTs at a loss in order to offset other realized gains (profits) and lower your tax bill.
  • Some NFTs are illiquid and can be difficult to sell. However, there are alternative solutions including donating your NFTs or using NFT harvesting tools.
  • Using losses to offset a portion of regular income or carrying losses over to a different tax year are both options for getting the most out of your unprofitable trades.

When it comes to investing in NFTs, it’s important to remember that anytime you sell an NFT for a profit, you are incurring a tax liability. Your tax bill is calculated based on how much profit you made selling your NFT and, when markets are good, you can quickly rack up a large tax bill.

Thankfully, there are many ways to optimize your tax bill. One of the best approaches for reducing your tax liability is to strategically sell NFTs at a loss in order to offset your gains. This strategy is known as “NFT tax loss harvesting.”

What is Tax Loss Harvesting?

Quick Sip

Selling your crypto assets at a loss in order to offset your capital gains is known as “tax loss harvesting.” The loss that you realize from an unprofitable sale can be directly subtracted from the capital gains that you have incurred for the year, thereby lowering your tax bill.

Tax loss harvesting is the practice of selling off certain assets at a loss in order to offset profits earned from the sale of other assets. This lowers your tax liability and usually means that you have to pay less in taxes.

In crypto, tax loss harvesting is normally done by selling cryptocurrencies such as Bitcoin and Ethereum. If you purchase Bitcoin, for example, and then you later sell it at a loss, you can use this loss to offset capital gains that you have incurred from other, profitable sales.

Let’s look at an example to better illustrate tax loss harvesting:

  • Alice has had a profitable year investing in crypto and is sitting at $15,000 in profits. The end of the year is coming and she knows she will be taxed on her capital gains.
  • Alice remembers that she had purchased a $5,000 NFT back in February.
  • The NFT has since declined in value due to the bear market, and Alice decides that she wants to sell at a loss and close out her position.
  • Alice sells her entire NFT in November for $2,500. The $5,000 she put into the NFT at the beginning of the year is now only worth $2,500 (since the price of the NFT collection has been cut in half).
  • Previously, she would have been taxed on $15,000 in capital gains. However, Alice has now used tax loss harvesting to lower her tax liability. She reports her $2,500 NFT loss alongside her $15,000 in profit, which means her actual tax bill is only calculated on $12,500 of capital gains.

Tax Loss Harvesting With NFTs

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NFTs pose a unique challenge when it comes to tax loss harvesting. Unlike cryptocurrencies, it can be difficult to find buyers for your particular NFT. In order to realize a loss, you must complete an “arm’s length transaction” where you sell your NFT to an unrelated party (AKA not your friend or yourself).

Tax loss harvesting can be done with more than just cryptocurrencies. Just as you can realize a loss by selling a cryptocurrency for less than you bought it for, you can also realize a loss by selling an NFT for less than you bought it for.

Unlike cryptocurrencies, however, not all NFTs have liquid marketplaces. While you can always find someone to buy your Bitcoin or Ethereum on an exchange, or even sell less well-known altcoins, many NFT collections have very low volumes and you may have trouble finding a buyer for your NFT. If you cannot sell your NFT, you cannot realize a loss. Thankfully, there are some easy solutions to this dilemma that we cover later in the article.

  • Tax Loss Harvesting Definitions

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    • Cost basis: The price at which you originally purchased your NFT (or any crypto asset) is referred to as your “cost basis”. The capital gain that you will be taxed on is determined by subtracting your cost basis from the price at which you ultimately sold your NFT.
    • Capital gain: A “capital gain” is the amount that your NFT (or any crypto asset) appreciates between your purchase price and your sell price. So if you purchased your NFT for a cost basis of $300 and you sell it for $900, your capital gain is $600. Your tax liability will be calculated as a percentage of this $600.
    • Arm’s length transaction: The main restriction when it comes to NFT tax loss harvesting is that your sale must be an “arm’s length transaction”. This means that you cannot, for example, agree to an arrangement with your friend where they buy your NFT for much less than it’s worth so that you can claim it as a loss. An arm’s length transaction is defined as a transaction where buyers and sellers are unaffiliated and are acting according to their independent interests.

How to Offset Taxes With NFTs

Realizing a loss on an NFT is as simple as selling the NFT for less than you bought it for. There are several popular methods for doing this.

Quick Sip

There are three main ways to sell NFTs for tax harvesting: Sell them on a marketplace like OpenSea, donate them to a non-profit organization, or sell them using special tax harvesting software that helps you realize a loss on any illiquid NFTs.

  • Sell on a Marketplace

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    The easiest way to sell your NFT is through a traditional NFT marketplace such as OpenSea. Each popular NFT collection has a page on these marketplaces that displays the different NFTs in the collection and who the owners are, and allows you to buy, sell, bid, and auction off your NFTs.

    Most collections have analytics that display how often NFTs from that collection are sold. If the collection that your NFT is a part of is fairly active, listing your NFT for sale and waiting for a buyer may be a viable option. If you’re looking to realize a sale quickly, your best bet is to list your NFT for a price that’s near the floor price — which is the lowest price that NFTs from that collection are selling for.

    Selling your NFT on a marketplace is a viable option only when there are willing buyers for your NFT. If you can’t find a buyer this way, you may have to resort to donating your NFT or using an NFT tax harvester.

  • Donate

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    Donating your NFT to a 501(c)(3) non-profit organization can make you eligible for certain tax breaks. In a donation, you are not taxed on the capital gains of your NFT value and you also get to deduct the entire fair market value of your NFT from your income (up to certain limits). This double tax break makes the donation approach one of the most efficient tax strategies if your NFT has significant value.

    Donations are strictly regulated by the IRS, however, so it’s important to do your reading before going down this route. If your NFT is worth over $5,000, you are subject to additional requirements in order for the IRS to acknowledge the donation, including a “qualified appraisal” by a certified appraiser.

    Find out more about the tax implications of donating NFTs here.

  • Sell Using an NFT Tax Harvester

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    The proliferation of worthless NFTs during the latest crypto cycle has led many to seek creative avenues for capturing tax losses on their digital assets.

    An emerging and promising model is to sell your NFT to a website that buys NFTs for pennies on the dollar with the express purpose of helping realize losses for tax harvesting. Two of the most popular websites using this model are Unsellable NFTs and NFT Tax Loss Harvestooor. Both of these websites will purchase any of your NFTs for a very small amount of ETH (less than 0.0001), thus facilitating a transaction that allows you to write your NFTs off as losses.

    Keep in mind that, while these websites are legitimate, there has been no official IRS guidance on their validity and some tax experts have expressed concerns that this model does not pass the “arm’s length transaction” test.

NFT Tax Loss Harvesting Tips

As with everything related to taxes, there are tactics that you can utilize to minimize your tax bill. It’s important to remember that you can carry over your losses and offset ordinary income when tax loss harvesting. Using crypto tax software can also come in very handy.

  • Carry Over Losses

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    You don’t necessarily have to claim all of your NFT capital losses in the same year. The IRS guidance allows you to carry over capital losses from a sale into future tax years. This is limited to $3,000 per year, however, you can theoretically claim the losses from a large capital loss on your taxes for many years into the future, $3,000 at a time. Find out more about capital loss carryover through the IRS website.

  • Offset Ordinary Income

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    Your NFT losses are normally used to offset capital gains, which are your earnings from your investments. However, you can also use your NFT losses to offset up to $3,000 of other forms of income in a given year. Learn more about using capital losses to offset income through the IRS website.

  • Use Crypto Tax Software

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    Keeping track of all your crypto tax liabilities can be a headache. Fortunately, a number of crypto tax software options are available to help you organize and itemize your tax liabilities, as well as help you harvest your tax losses. Check out these tax software options.

Frequently Asked Questions

  • Are NFTs taxed?

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    Yes, capital gains on NFTs are taxed just like those on cryptocurrencies. If you buy an NFT and sell it for more than you bought it for, you are liable to pay capital gains tax.

  • How can I write off my NFT losses?

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    You can subtract your NFT losses from your capital gains. If you sold crypto assets at a profit, you are liable to pay capital gains tax. Your tax bill can be reduced, however, by subtracting the losses from an unprofitable sale from the gains that you have incurred for the year.


  • Is burning an NFT a taxable event?

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    The IRS has not issued guidance on burning NFTs (destroying the NFT by sending it to a wallet address inaccessible to anyone), and many tax experts say that burning NFTs or crypto does not constitute a loss.

    In order to realize a loss, you must complete an “arm’s length transaction” with a third party who purchases your NFT. If your NFTs are worthless, websites like NFT Tax Loss Harvestooor will buy them and help you realize a loss.

  • Can I sell my NFTs to a friend to realize a loss?

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    No, you must sell your NFT to an unrelated party who buys it uncoerced. This is known as an “arm’s length transaction”. If your NFTs are worthless, websites like NFT Tax Loss Harvestooor will buy them and help you realize a loss.

  • Do I need to file crypto taxes if I didn’t sell?

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    You are only liable for capital gains tax if you sell your crypto assets or NFTs. If you have not made a sale, you are not liable for paying taxes on these assets.

Contributors

  • Avatar of George Hristov

    George is a tech writer interested in web3 startups and communities. In the dynamic world of crypto, he stays plugged in to the day-to-day headlines, deep dives, and industry commentary.

  • Avatar of Gary Anglebrandt

    Gary Anglebrandt is a US-based editor, copywriter, and communications consultant with a background in business and international news. Beyond the US, he has worked from Seoul and Beijing, and continues to work with professionals based around the globe.