Understanding Tax-Loss Harvesting

If you hold NFTs (or any investment vehicle), you should be looking for ways to reduce your tax burden before the end of the tax year. If the price of your NFT has sunk, there may be a silver lining that can save you thousands of dollars on your tax bill… Tax-Loss Harvesting, or selling NFTs that have lost value in order to offset capital gains from other investments.

When it comes to NFTs, liquidity and demand shortages can make it difficult to realize a loss. Unsellable solves this issue by providing a way to instantly sell your worthless NFTs and harvest the losses.

Each harvest transaction is recorded on the public ledger. Because Unsellable supports NFTs on the Ethereum blockchain, the record in question is Etherscan. By collecting transaction information from the original purchase of an NFT, as well as from the sale to Unsellable at a loss, users can show a realized loss and potentially receive a tax reduction.

Let’s break down what Tax-Loss Harvesting is, see how it works, take a look at why NFTs are great candidates for Tax-Loss Harvesting, and walk through how to identify the best candidates for tax savings in your NFT portfolio.

What is tax-loss harvesting? 

Any time you sell a capital asset like stocks, real estate assets, cryptocurrencies or NFTs at a profit, you’ll be required to pay capital gains tax based on how much money you’ve made from the sale. Your taxes are calculated by taking the amount you sold the asset for, subtracting the amount you originally paid for it (along with any transaction fees), and then applying appropriate state and federal capital gains taxes to that amount.

Tax-Loss Harvesting is a strategy that many investors use to reduce their capital gains in a given tax year by selling some of their assets at a loss. While losing money on an investment never feels good, Tax-Loss Harvesting is a strategy aimed at making those losses work for you by counteracting the capital gains you’ve experienced, harvesting those losses to reduce the net amount you are required to pay capital gains taxes on.

How Tax-Loss Harvesting works 

While Tax-Loss Harvesting is an incredibly common strategy in the world of stocks and securities, NFTs also provide a strategic opportunity for investors. Let’s look at an example to get a better understanding of how it works:

1) Dan buys an ApeNFT for $500, and a TrashNFT for $500
2) Dan’s ApeNFT rises to $1,000 in value
3) Dan’s TrashNFT drops to $0 in value, and becomes basically unsellable - there are no buyers
4) Dan sells his ApeNFT for $1,000, making $500 in capital gains

If that were the end of the story, Dan would have to pay taxes on his $500 of capital gains from the sale of his ApeNFT.

But Dan is smart. He knows about Tax-Loss Harvesting, and he wants to make the most of his losses by selling his loser.

Unfortunately, TrashNFTs aren’t selling… at all. The floor price is 0.01, there hasn’t been a sale in the collection for months, and there are simply no buyers for Dan’s TrashNFT.

Luckily, Dan found out that Unsellable is there to help him sell his “unsellable” TrashNFT and provide instant liquidity so he can harvest his losses. Dan's journey continues:

5) Dan uses Unsellable to sell his TrashNFT for $0.01
6) He claims the $499.99 of losses on his tax return
7) Now, Dan only owes taxes on $0.01 of capital gains, because his losses from his TrashNFT write down almost all of the gains from his ApeNFT.

Would Dan have been happier if both NFTs went up in value? Of course! But not every investment is a winner, and the key is to use those losses to bring down your tax bill. By using Unsellable to help Tax-Loss Harvest his losers, Dan reduced his tax bill by almost $500, saving him hundreds of dollars in capital gains taxes this year!

Don’t Have Capital Gains This Year? You Should Still Harvest Your Losses

Maybe you didn't sell any of your capital assets for a gain this year. Is it still worth pursuing a Tax-Loss Harvesting strategy at the end of the year?

Yes! You can report carry over net losses up to $3,000 (or $1,500 if married and filing separately), and you can carry over capital losses indefinitely. You'll figure your allowable capital loss on Schedule D and enter it on Form 1040, Line 13.

If you have an unused prior-year loss, you can subtract it from this year's net capital gains. That means that even if your losses this year are greater than your gains, you'll be able to use them in the future to bring down your tax burden.

Which NFTs Should I Sell?

It's generally a poor decision to sell an investment that you believe in, even one with a loss, solely for tax reasons. If you believe strongly in your NFT and the team behind the project, hold on to it. That said, we all have NFTs in our wallet that we no longer believe in. Often times the founders and project team have abandoned the project, and it has lost all momentum. These are perfect NFTs to sell in order to harvest your losses.

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