NFT investors have taken a hit this year.
Between market contracting, failed projects, and several stuttered launches, buyers are increasingly finding themselves with assets that represent an (n often significant) loss-to-come.
As the 2022 tax year wraps up and people begin gathering information for their taxes, NFT traders may hope to tax-loss harvest. This means they may sell their assets at a loss to offset current or future capital gains.
But it’s not as easy as it sounds. Especially right now.
Because each NFT is intentionally unique, guessing their value is just that – guesswork. You can hold them up to comparable NFTs to estimate, but it’s still a reasonably fluid value market.
So it’s hard even to acknowledge which items should be sold, unless you’re going to sweep your most valuable assets across the board.
Crypto tax platforms, portfolio trackers, NFT evaluators, and NFT markets are working hard to come up with a solution for NFT holders, trying to give investors a better idea of the losses they can expect to put a pin in from the sale of tokens that are upside-down right now.
Of course, that doesn’t help NFTs that essentially hold no value. The IRS says that assets must be sold in an “arm’s length transaction” to realize asset loss. Selling a token on an exchange would work in this case.
But they still have to convince buyers to purchase something that doesn’t hold much value. Speculative investors may be their best bets here.
Some tax-loss harvesters are attempting to set up reciprocal services, with the basic idea being you pay me in ETH for my NFT, and I’ll pay you a slightly more significant amount for yours.
Of course, these don’t meet the IRS’s requirements, so investors should tread carefully.
The best thing people can do right now if they’re worried about holding onto the losses from their NFTs is to sell them through an exchange for a loss.
NFTs, appealing because of their lack of regulation, also pose a significant risk to investors – precisely because of their lack of regulation.
It’s a Catch-22 catching up with many at the end of the year with the crypto market nose-down.