What is the NFT tax loophole?

A final NFT tax loophole is known as tax-loss harvesting (TLH) . If you have an NFT that has become worthless over time, you can sell the NFT to realize the loss for tax purposes and then use the loss to offset capital gains in other parts of your portfolio.

Can I write off NFTs from taxes?

Gains and losses from NFT sales are taxable , and the tax rate depends on how long the NFT was held and the taxpayer's total capital income. Losses from NFT sales can typically be deducted to offset capital gains.

How do I claim tax loss on NFT?

The easiest way to file your NFT taxes Capital gains and losses from NFTs and cryptocurrencies should be reported on Form 8949, then included on Schedule D . To report your NFT transactions on your tax return, you'll need the following information. Manually tracking this information for tax purposes can be difficult.

What can you legally do with an NFT?

Those projects grant commercial rights to the artwork you own. Some examples are Bored Apes and Doodles. Those grant you commercial rights in the artwork of the NFT you purchased, meaning that you have the right to make and sell products like T-shirts, mugs and posters using the artwork that you have .

Are NFTs worthless now?

Crypto marketing firm DappGambl estimates that 95% of NFT's on the market are now worthless .

How do NFTs pay passive income?

What are NFTs, and how can they generate passive income? Ans. NFTs are non-fungible tokens representing ownership of unique digital assets. You can earn passive income from NFTs through activities like renting, staking, lending, and royalties from sales .

How much crypto tax loss can I write off?

Frequently asked questions. Can you write off crypto losses on your taxes? Yes. Cryptocurrency losses can be used to offset your capital gains and $3,000 of personal income for the year .

Can I claim crypto losses on my taxes?

Yes, you can write off crypto losses on taxes even if you have no gains . If your total capital losses exceed your total capital gains, US taxpayers can deduct the difference as a loss on your tax return, up to $3,000 per year ($1,500 if married filing separately).

Do you have to pay tax on NFT profits?

Some NFT platforms let you trade one NFT for another - like trading cards. This is viewed as a disposal of an asset - like swapping one crypto for another - so it's subject to Capital Gains Tax. Like the above, only the profit made from any swap will be subject to Capital Gains Tax .

Is buying an NFT with crypto taxable?

Spending and Trading NFTs in Games: Whether you're spending crypto to buy in-game items; purchasing in-game items with the game's native tokens; or trading in-game tokens, these are all taxable transactions . Each transaction is considered a sale that creates a capital gain or loss.

Can you sell an NFT without spending money?

Technically, you can sell an NFT even if you have no money . However, it is worth noting that creating and listing an NFT for sale typically requires some upfront costs, such as paying for the creation of the digital asset and the transaction fees associated with listing it on a marketplace.

Are NFTs subject to sales tax?

NFT marketplaces such as OpenSea do not source or collect sales tax, so individual sellers must independently calculate and collect the required state sales tax.

NFT Tax Loss Harvesting: Save Thousands In Taxes Using NFTs (2024)

NFT Tax Loss Harvesting: Save Thousands In Taxes Using NFTs (1)

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While the declining hype around NFT trading has been a concern for investors, it may act as a silver lining for tax saving.

Losses incurred by you can be claimed to offset your capital gains and reduce your overall tax bill. And this can be done through NFT tax loss harvesting. In this article, we discuss everything you need to know about harvesting your NFT losses and how you can leverage it to reduce your tax burden.

What Is NFT Tax Loss Harvesting?

NFT tax loss harvesting is the practice of selling a non-fungible token (NFT) at a loss to offset crypto taxes on other capital gains. The idea is to sell the NFT at a lower price than what was paid for it, and then use the loss to offset capital gains from the sale of other assets.

This strategy helps to reduce your overall tax burden and potentially increase your after-tax return on investment. To know in-depth about tax loss harvesting for all your crypto assets, you can refer to our crypto tax loss harvesting guide.

You can claim your capital losses to offset up to $3,000 of income for the given tax year. Any additional losses can be taken forward into future years to offset gains.

Step-By-Step Guide For NFT Tax Loss Harvesting

To give you a better picture of how to use your NFTs for tax loss harvesting, we have broken down the entire process into three steps:

How To Determine Which NFTs Can Be Used To Realize Losses?

Tax loss harvesting requires you to identify NFTs that can be disposed of to realize losses. To do this, you first need to look into the fair market value of your NFTs at the time of selling.

However, this process can become challenging as every NFT is unique with variable market values. Automated software like Kryptos can simplify this by helping you identify tax loss harvesting opportunities for your assets.

Once you find their fair market value, you can then subtract it from the cost basis of your NFT to determine whether or not they can be sold to realize losses.

How To Dispose Of Your NFTs To Realize Losses?

Once you have decided which NFTs can be used to offset your capital gains, it is time to dispose of them to realize losses. While there are many methods to do so, the best way to tax loss harvest your NFTs is to sell them to someone else at a loss.

But because the NFT market is hype-driven, it often becomes difficult to sell your NFTs if the craze is gone. In this case, there may not be any purchaser to actually buy your NFTs and you will not be able to realize a loss.

Another way to dispose of your NFT for tax deductions is to donate them. These transactions are exempted from taxes for both the donor and the receiver if you fulfill these three criteria:

You have held the NFT for more than a year
You are donating it directly to the concerned organization
The receiver falls under the tax-exemption category by IRS

It is important to note that the disposal of NFTs must be a ‘arm's length transaction’ to reap tax benefits. This means that both parties concerned with the transaction of the NFT asset should be independent of each other, acting solely in their self-interest, and shouldn’t be influenced by the other.

When Should You Not Tax Loss Harvest Your NFTs?

While we discussed the right way to dispose of your NFTs, here are three scenarios where you shouldn’t use your NFTs for tax deductions.

Harvest NFT Losses With Kryptos

NFT tax loss harvesting is a great way to offset your capital gains and improve after-tax return. However, unlike other assets, NFT transaction guidelines can be complex. While harvesting your losses manually can be considered, it may lead to missed tax-saving opportunities and higher tax bills.

Kryptos helps you calculate your realized and unrealized losses and gains so that you can maximize your tax savings. To do this, all you need is to auto-sync your transactions and let the platform do the rest for you. Sign up today to try Kryptos for free.

FAQS

1. Can I burn an NFT to realize a loss?

The IRS does not have any clear guidelines for this type of transaction at present and so this method must be avoided if you want to realize a loss by disposing of your NFT.

2. Can I sell an NFT to myself to realize a loss?

You must sell your NFTs in arm's length transactions to gain tax benefits. Selling NFT to yourself doesn’t fulfill the requirement of two independent parties involved in the NFT disposal and it will not be considered for tax benefits.

3.Can I sell an NFT to my friend to realize a loss?

If you sell an NFT to your friends or family, it may become hard to prove that the two parties are acting independently, especially if you want to realize a loss. So, we suggest you do not use this method.

4. Can I claim my worthless NFT as a casualty or theft loss?

No, you cannot claim your worthless NFTs as a casualty or theft loss as the ‘Tax Cuts and Jobs Act of 2017’ has removed both of these types of cases from tax exemption.

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All content on Kryptos serves general informational purposes only. It's not intended to replace any professional advice from licensed accountants, attorneys, or certified financial and tax professionals. The information is completed to the best of our knowledge and we at Kryptos do not claim either correctness or accuracy of the same. Before taking any tax position / stance, you should always consider seeking independent legal, financial, taxation or other advice from the professionals. Kryptos is not liable for any loss caused from the use of, or by placing reliance on, the information on this website. Kryptos disclaims any responsibility for the accuracy or adequacy of any positions taken by you in your tax returns. Thank you for being part of our community, and we're excited to continue guiding you on your crypto journey!