NFT Tax Loss Harvesting Gains Popularity as Year-End Nears

As we approach the end of the year, NFT traders are discovering an unexpected use for their seemingly worthless tokens – selling them for pennies to offset their capital gains tax. With the IRS’s criminal investigation unit showing a heightened interest in crypto cases, it’s become a prime time to unload these unwanted tokens.

This savvy strategy, known as tax loss harvesting, is a lifesaver for traders who’ve had both successful and unsuccessful investments, helping them reduce their taxable liability and ultimately save money. But the big question remains: who would want to buy these seemingly worthless NFTs?

Enter projects like Harvest.Art, Unsellable NFTs, and Sol Incinerator, all on a mission to purchase these seemingly useless NFTs to assist traders in their tax loss harvesting endeavors.

“People tend to procrastinate, so our busiest period starts around December 26th and goes right up until the stroke of midnight on New Year’s Eve,” revealed NetDragon, a pseudonymous developer and co-founder of Harvest.

Skyler Hallgren, the director of partnerships at Unsellable, highlighted that NFTs were many people’s first foray into investing, and they might not be well-versed in strategies like tax loss harvesting.

“A lot of those folks are not as savvy when it comes to end-of-year tax planning as traditional investors might be. Most traditional investors are…being strategic about tax loss harvesting and finding ways to bring down their tax burden. Most Web3 folks don’t come from that world,” explained Hallgren.

But why would anyone buy worthless NFTs, you might wonder?

Each of these services has its unique approach to attract customers. Unsellable offers to purchase NFTs for one penny each but charges a service fee of 0.002 eth (around $4.60 at current rates) per NFT offloaded, up to a maximum of 0.08 eth (about $184.21) per transaction, excluding gas fees. Users can sell up to 500 NFTs per transaction from multiple collections.

Hallgren pointed out, “Most of our users are not looking to get into a different speculative crypto investment; they’re looking to make a really straightforward, no-nonsense end-of-year tax strategy.”

In contrast, Harvest pays one gwei (one-billionth of one eth) for each NFT sold through their platform and doesn’t charge an upfront service fee. Additionally, Harvest offers one “bid ticket” for each NFT sold, allowing users to bid on some of the over 110,000 NFTs held by Harvest.

Instead of relying on upfront fees, Harvest hopes to profit by leveraging the cyclical nature of the NFT market. For example, a Web3 game called KOKODI took so long to release that many users lost hope and offloaded their NFTs through Harvest. NetDragon shared, “We held 150+ of these NFTs when they finally announced the release of their game, and the floor shot up to 0.1 ETH each. Without us knowing much about it, Harvest users independently started auctions for most of the KOKODI, and started cycling assets back into circulation.”

The total cost of offloading NFTs can vary significantly. For instance, a recent sale of 459 NFTs through Harvest incurred about $300 in gas fees, not including the gas costs of approving each collection for transfer. Meanwhile, a recent sale of 80 NFTs through Unsellable cost about $630 after Unsellable’s capped service fee and gas fees, again excluding the gas costs of approving each collection for transfer.

Hallgren mentioned, “Back in the middle of the year, we did an analysis on about 900 of our users. I realized that the average user realized losses of $4,200. I feel a high level of confidence that there are hundreds of millions of dollars in unrealized losses that are frozen right now.”

Both Unsellable and Harvest operate on the Ethereum blockchain, with Harvest also supporting certain Layer 2 networks. Solana is serviced by Sol Incinerator, while several other chains, including the increasingly popular Bitcoin Ordinals protocol, seem to lack a similar service.

With the IRS’s criminal investigation division now focusing on crypto tax evasion, it’s a crucial moment for crypto traders to consider their tax obligations. Recent reports suggest that the IRS is scrutinizing everything from unreported capital gains from crypto sales to income from mining and cryptocurrency payments for services, wages, rental income, and gambling winnings. They are also investigating whether individuals are hiding their cryptocurrency ownership to evade taxes.