How cryptocurrency traders are using NFTs to harvest tax losses.
Crypto traders are converting worthless NFTs into tax breaks. They’re using a service started just for that purpose. Others are taking advantage of IRS tax loopholes for tax breaks on their losses from BTC, ETH, and others this year.
That’s how bad the crypto winter is getting as the frost sets into planet earth’s northern hemisphere. But in a sign of persistence and entrepreneurial spirit, crypto markets are reacting. NFT buyers are now helping people with their underwater smart contracts. They’re helping sellers unload their junk NFT and get an official receipt for their tax breaks.
Investors are taking losses on NFTs for the tax breaks
It’s not unlike what happened after the 2008 financial crisis. Back then, billions of dollars in mortgage-backed, fixed-income securities (MBS) had become toxic. They were offloaded for the big tax breaks. The banks and financial institutions that got tangled up in those then-innovative derivatives markets bailed out.
Yet it is also totally unlike what happened after the 2008 crisis. Because it was the government and central bank that bought most of those toxic assets. It was like a big institutional bailout for the banks that took losses in the housing and lending bubble of that decade.
Cryptocurrency creativity keeps the wheels turning
Instead, with loss-laden NFTs, the free market and entrepreneurship are prevailing again. NFT buyers have emerged to solve a problem created by the free market and entrepreneurship. It comports with the ethos of the cryptocurrency sector and the liberty of the free and open Web3 Internet. Plus, there are tax breaks, so it’s federally friendly too.
The Guardian reported Thursday:
Now – alongside the broader crypto market – the appetite for NFTs is so diminished that a specialized market has sprung up for collectors looking to sell off their once-valuable “digital collectibles” as tax losses to offset their income tax bills.”
Offloading their unsellable NFTs isn’t the only way crypto investors are hauling tax breaks off of this crypto winter’s brutal losses. They’re also selling their unrealized losses and rebuying to realize a loss for tax purposes while holding their long positions for a future rally.
How crypto traders are getting other tax breaks
The tax loophole is that cryptocurrencies are considered property, not a security, so the 30-day stock wash rules do not apply to them. That means if you hold a position at a loss, you can sell your position and repurchase to hold the losses against any gains to decrease your tax obligations from crypto investments.
Microstrategy took advantage of tax breaks from this loophole in Q4 2022, according to a recent filing. The Michael Saylor-led company accumulated $42.8 million more BTC from the beginning of Nov through near the end of Dec. But also sold some $12 million during that period for tax purposes.