Tax Loss Harvesting Your Worthless NFTs For Fun & Profit
URGENT: MUST DO BEFORE THE YEAR IS OVER
AUTHOR’S NOTE: GOLEM IS NOT A TAX PROFESSIONAL. NONE OF THIS SHOULD BE CONSIDERED FINANCIAL ADVICE, ACCOUNTING ADVICE, LEGAL ADVICE, TAX ADVICE, OR ADVICE OF ANY KIND. PLEASE CONSULT WITH A PROFESSIONAL ABOUT ANYTHING REGARDING YOUR TAXES BEFORE LISTENING TO AN ANONYMOUS CARTOON ON THE INTERNET. THIS IS FOR ENTERTAINMENT PURPOSES ONLY.
Hello my friendly frens.
I’m coming to you today with a very important and URGENT task that you should really consider capitalizing on if you bought, sold, or traded any NFTs this past year.
It’s a little thing called: TAX LOSS HARVESTING
What is tax loss harvesting?
Tax loss harvesting is when you *realize* losses on assets you purchased made to lower the amount of taxes you have to pay on the gains you made selling other assets in profit over the past year.
Here’s a good explanation in more detail:
Applied to NFT tradoors, here’s a simplified example:
You bought NFT A for 0.1 $ETH when $ETH was at $3,000, so it cost you $300 to buy the NFT.
You then sold NFT A 1 week later for 1 $ETH, when ETH was still at $3,000.
$300 (purchase) - $3,000 (sale) = $2,700 profit
You then would need to pay short-term capital gains tax on that profit of $2,700.
Let’s just say that capital gains tax is 20% for the bracket you are in.
$2,700 * 20% = $540 capital gains tax.
Brutal right?
This is where the magic of Tax Loss Harvesting comes into play.
Let’s say in that same week you also purchased NFT B for 0.3 eth ($900). Fast forward to today, and that NFT B is worth $0.
If you sell that NFT B for $1, then you *realize* the loss.
$900 (purchase) - $1 (sale) = $-899 loss.
At the end of the year then (assuming you only ever bought these two NFTs) you would have:
NFT A ($2,700 profit) - NFT B ($899 loss) = $1,801 profit.
Then you need to pay capital gains tax on your $1,801 profit * 20% = $360.20.
$540 - $360.20 = $179.80 (saved!)
So… by simply getting rid of a useless, dead, NFT during the last month of the year, you end up saving yourself a nice $180 on your capital gains taxes.
Simple, right?
“But Golem, who is going to buy my worthless NFTs for $1 so that I can claim them as a loss?” You may be asking…
Great question, anon.
Last year this kind of thing was much harder to pull off since nobody had to deal with doing taxes for NFTs before, so nobody had really ever thought about this problem.
It was SUCH a big pain point however that a handful of people & companies have stepped up this year to provide a simple NFT Tax Loss Harvesting as a service to degens looking to optimize their taxes.
How they work is quite simple actually.
They write a smart contract that automatically buys whatever NFT you approve it to buy from you for a preset amount—usually $0.01 penny.
Then, depending on the company/contract, either that will be it free or you’ll have to pay them $1-$5 fee to do the transactions.
And you have to pay the gas fee for it too of course.
That’s it!
Your worthless NFTs that were sitting in your hidden folder or ones that took massive, giga, L’s on now can be put to use lowering your tax bill!
(Keep reading to find out the company I’ve been using for this service below!)
I’d argue that whether you bought a handful of NFTs this year to 100’s or 1,000’s of NFTs this year, this is an extremely valuable service that you should really use to your benefit.
Because…
If you never sell your worthless NFT, then you never get any benefits from it!
At least this way, you get to lower your tax burden.
Let’s say you got rugged, like the project was a legitimate rug. It was promising at the time and you spent $1,000 on the NFT. Then the project rugs and the founders steal all the money and all you’re left with is a useless NFT.
If you never sell the NFT, then you don’t get to write it off as a loss on your taxes.
Yes you were scammed, yes the NFT is worthless, but no the tax man doesn’t care.
If you sell it to one of these companies for $0.01 however, then you can claim it as a loss on your taxes since… you actually sold the NFT and realized the loss!
This is a strategy that investors have been doing for decades to lower the amount of $ they have to pay on their capital gains taxes—it’s perfectly legal and tbh encouraged in the investing community.
It’s about playing smart, fam.
There are a few IMPORTANT caveats to point out:
You can’t sell a worthless NFT to yourself for $1, then claim it as a loss, that’s called WASH TRADING and is illegal
You can’t sell an NFT for much less than it is worth to yourself or a friend to claim a lower capital gain/loss on the asset. Whatever you sell it for has to make sense in terms of the going rate of the market. You can’t sell a BAYC for 1 $ETH when the floor is 75 $ETH to claim a loss or smaller capital gains on your taxes. That is also known as WASH TRADING and is very illegal
You can’t sell an NFT for $1 on December 31st, 2022; then rebuy that same NFT for $1 on January 1st, 2023 and claim a loss on your taxes, that is also illegal (I believe the timeframe is 30 days per the rules, but to play it safe, just consider anything that you sold as burnt and forget about it forever.)
Losses can basically only be applied to your capital gains. If your losses exceed your capital gains then it can only deduct up to -$3,000 from your overall income. The rest can be rolled over into the next tax year. Example: You made $50,000 in capital gains. You have -$60,000 in losses. That would offset your capital gains to $0. Then, you can deduct -$3,000 from your overall income of the year. The remaining $-7,000 can be deducted from your capital gains the next year.
And that’s it really.
Again, I’m not a tax professional and none of this should be deemed as advice, I’m just an anon cartoon on the internet—you should really consult with a tax professional before doing this stuff.
Here’s the company that I’ve been using to get rid of my useless NFTs:
https://www.unsellablenfts.com/
They have a good walk-through video on their site to explain how the whole process works.
Here’s a quick breakdown for you:
Connect your wallet to the site
Select the NFTs that you want to sell to them
Approve the unsellable contract allowing them to take the NFTs that you want to sell them
Sell your NFTs!
Approve the transaction (Paying Unsellable 0.0066 $ETH per collection up to a maximum of 0.055 $ETH for providing the service + Gas)
Put in your email to get a receipt of the transaction!
And that’s all there is to it!
A lot of appreciation to
(https://twitter.com/unsellablenfts) for setting up this service for all the degen NFT traders, it makes the process a lot nicer than it was last year.You’ve got about 3-4 days to book your losses, don’t forget!
Good luck & Godspeed out there anon.
Until next time.
Your fren,
Golem