Author Topic: Crypto Tax Losses For Illiquid NFTs?  (Read 603 times)

goodmoneygoodlife

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Crypto Tax Losses For Illiquid NFTs?
« on: December 28, 2021, 10:35:37 AM »
Hey all, I know a lot of folks in the NFT space that are harvesting tax losses by selling an NFT they bought at low prices.

Example: I bought some NFT at 1 ETH and sell it at .02 ETH (floor's let's say at .03 ETH) to take a tax loss.

This is most ideal, but a lot of times, NFTs are unsellable and have no liquidity.

I am wondering if it's possible to send the NFT to a burn address to trigger a 'sale' (i.e. address==0x0)? For example, if there's no counterparty, I can't take my losses (which are very real):
1. I buy ETH at $2K/ETH.
2. I buy an NFT for 1 ETH when it's at $4K/ETH. This transaction constitutes a 2k short term cap gain that I'll be taxed on.
3. The NFT has no more buyers nor liquidity. No one will buy it even for 0 ETH. But I'd like to take losses to offset my 2k short term cap gain, because I don't wanna pay taxes for 2k gain when I *lost* money.

Has anyone dealt w/ this or anything related to tax loss harvesting for illiquid things?

trollwithamustache

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Re: Crypto Tax Losses For Illiquid NFTs?
« Reply #1 on: December 28, 2021, 11:02:56 AM »
But you didn't loose any money! you have the NFT you wanted.

daverobev

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Re: Crypto Tax Losses For Illiquid NFTs?
« Reply #2 on: December 28, 2021, 11:34:27 AM »
Can you somehow abandon ownership of this 'thing' you bought? Like, quit title...

Does the government even see this thing as an investment - because if you went out and bought a CRT TV for $4k then TFTs came out... you can't claim a loss, it's a personal item.

DaTrill

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Re: Crypto Tax Losses For Illiquid NFTs?
« Reply #3 on: December 28, 2021, 01:28:10 PM »
NFTs are worthless?  Who knew? 

Using fictitious amounts to buy virtual items then claiming losses to offset real gains...  nobody would even report a penny of gains if the IRS allowed this.   

goodmoneygoodlife

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Re: Crypto Tax Losses For Illiquid NFTs?
« Reply #4 on: December 30, 2021, 07:35:22 AM »
@daverobev - Googling around - the govt of course would like to dig into your pockets for any NFT gains. One could burn NFTs and give up ownership by sending it to a burn address -- but not sure if that works in the same manner as quitting title, tax-wise (ownership wise, it works like that because you won't be able to get the NFT back after burning it).

Looks like I'll just talk to a CPA - seems like the other comments are just full of trolls with the hurr-durr 'crypto is nOt ReAl~~~ eVeN tho the teCh HaS a mOre RapId adOPTion RaTe Than the inTERNet~~~~' mindless drivel which is completely orthogonal to my question.

secondcor521

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Re: Crypto Tax Losses For Illiquid NFTs?
« Reply #5 on: December 30, 2021, 08:11:52 AM »
I'm certainly no expert in crypto, although I think I have a basic understanding.

There is a FAQ on crypto here, which refers to Notice 2014-21:

FAQ:  https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions
Notice 2014-21:  https://www.irs.gov/pub/irs-drop/n-14-21.pdf

Based on a quick scan it seems that your question has not yet been addressed.  You may want to ask the US Treasury for guidance as indicated at the beginning of Notice 2014-21.

The general problem with your situation is that the value of anything is normally defined (in the US, currently) by the fair market value, which requires a (public) market, which by your question doesn't exist.  So the IRS doesn't really know the value of your crypto, so they therefore don't know that it's worthless.

With more traditional assets like stocks, there was (and presumably still is) a process where a brokerage firm would "buy" back the stock at $0, which would simultaneously relieve you of ownership and establish the value so you could take a tax loss.  By the nature of crypto, there isn't (yet) such a similar service.  Perhaps some business or crypto speculator will take on that task in the future, since there is a bit of a market need.

You could take a more cowboy approach and try to meet the definition of a sale here:

https://www.irs.gov/faqs/capital-gains-losses-and-sale-of-home/losses-homes-stocks-other-property/losses-homes-stocks-other-property-1

And then report the "sale" on your tax return and take your chances with an IRS audit.  I don't know the details of crypto transactions, but maybe your original idea of selling to a NULL address is in the ballpark.  My guess would be that the design of crypto would prevent such a transaction, but maybe not.

The most conservative approach would be to contact the Treasury Department and ask for guidance as mentioned above.

trollwithamustache

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Re: Crypto Tax Losses For Illiquid NFTs?
« Reply #6 on: December 30, 2021, 09:14:11 AM »
I'm certainly no expert in crypto, although I think I have a basic understanding.

There is a FAQ on crypto here, which refers to Notice 2014-21:

FAQ:  https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions
Notice 2014-21:  https://www.irs.gov/pub/irs-drop/n-14-21.pdf

Based on a quick scan it seems that your question has not yet been addressed.  You may want to ask the US Treasury for guidance as indicated at the beginning of Notice 2014-21.

The general problem with your situation is that the value of anything is normally defined (in the US, currently) by the fair market value, which requires a (public) market, which by your question doesn't exist.  So the IRS doesn't really know the value of your crypto, so they therefore don't know that it's worthless.

With more traditional assets like stocks, there was (and presumably still is) a process where a brokerage firm would "buy" back the stock at $0, which would simultaneously relieve you of ownership and establish the value so you could take a tax loss.  By the nature of crypto, there isn't (yet) such a similar service.  Perhaps some business or crypto speculator will take on that task in the future, since there is a bit of a market need.

You could take a more cowboy approach and try to meet the definition of a sale here:

https://www.irs.gov/faqs/capital-gains-losses-and-sale-of-home/losses-homes-stocks-other-property/losses-homes-stocks-other-property-1

And then report the "sale" on your tax return and take your chances with an IRS audit.  I don't know the details of crypto transactions, but maybe your original idea of selling to a NULL address is in the ballpark.  My guess would be that the design of crypto would prevent such a transaction, but maybe not.

The most conservative approach would be to contact the Treasury Department and ask for guidance as mentioned above.

OP's question is addressed by the IRS. It does't matter how hard you want crypto to be a currency, the IRS has issued their decision that it is an asset. So thats what it is until congress passes a law that says something different. No amount of redditting or other forums can change tax law.

OP bought an asset. And then traded that asset for another asset  (the NFT).  There is no loss because OP still has the NFT. OP can't get rid of it, but the IRS doesn't care, thats OP's problem.

Now, OP may be able to go to his friend, hand him a 20 dollar bill in cash. yes, remember Andrew Jackson himself? and maybe that friend will bid a dollar to buy the NFT on some public auction site so there is a record of a transaction. But that puts you in the situation d-r described.

This is not an anti crypto statement, OP should have kept the Eth, thats actually worth owning.  NFT's are this generation's equivalent of the limited edition prints my Mom owns.


secondcor521

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Re: Crypto Tax Losses For Illiquid NFTs?
« Reply #7 on: December 30, 2021, 09:20:29 AM »
I'm certainly no expert in crypto, although I think I have a basic understanding.

There is a FAQ on crypto here, which refers to Notice 2014-21:

FAQ:  https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions
Notice 2014-21:  https://www.irs.gov/pub/irs-drop/n-14-21.pdf

Based on a quick scan it seems that your question has not yet been addressed.  You may want to ask the US Treasury for guidance as indicated at the beginning of Notice 2014-21.

The general problem with your situation is that the value of anything is normally defined (in the US, currently) by the fair market value, which requires a (public) market, which by your question doesn't exist.  So the IRS doesn't really know the value of your crypto, so they therefore don't know that it's worthless.

With more traditional assets like stocks, there was (and presumably still is) a process where a brokerage firm would "buy" back the stock at $0, which would simultaneously relieve you of ownership and establish the value so you could take a tax loss.  By the nature of crypto, there isn't (yet) such a similar service.  Perhaps some business or crypto speculator will take on that task in the future, since there is a bit of a market need.

You could take a more cowboy approach and try to meet the definition of a sale here:

https://www.irs.gov/faqs/capital-gains-losses-and-sale-of-home/losses-homes-stocks-other-property/losses-homes-stocks-other-property-1

And then report the "sale" on your tax return and take your chances with an IRS audit.  I don't know the details of crypto transactions, but maybe your original idea of selling to a NULL address is in the ballpark.  My guess would be that the design of crypto would prevent such a transaction, but maybe not.

The most conservative approach would be to contact the Treasury Department and ask for guidance as mentioned above.

OP's question is addressed by the IRS. It does't matter how hard you want crypto to be a currency, the IRS has issued their decision that it is an asset. So thats what it is until congress passes a law that says something different. No amount of redditting or other forums can change tax law.

OP bought an asset. And then traded that asset for another asset  (the NFT).  There is no loss because OP still has the NFT. OP can't get rid of it, but the IRS doesn't care, thats OP's problem.

Now, OP may be able to go to his friend, hand him a 20 dollar bill in cash. yes, remember Andrew Jackson himself? and maybe that friend will bid a dollar to buy the NFT on some public auction site so there is a record of a transaction. But that puts you in the situation d-r described.

This is not an anti crypto statement, OP should have kept the Eth, thats actually worth owning.  NFT's are this generation's equivalent of the limited edition prints my Mom owns.

I misread OP and thought they had ended up with a worthless crypto.  I reread and see now that they have a (probably) worthless NFT.

The IRS has issued regulations on (some) cryptocurrencies, which I linked.  And you're right that they're basically treating cryptocurrencies as capital gains type assets.

MustacheAndaHalf

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Re: Crypto Tax Losses For Illiquid NFTs?
« Reply #8 on: January 01, 2022, 04:48:15 AM »
It's very rare to see a post about crypto and losses, so it becomes a chance for everyone who dislikes crypto to pile on and feel vindicated.  On the plus side, the next poster with a similar post will probably get a little less trolling.

1. I buy ETH at $2K/ETH.
2. I buy an NFT for 1 ETH when it's at $4K/ETH. This transaction constitutes a 2k short term cap gain that I'll be taxed on.
3. The NFT has no more buyers nor liquidity. No one will buy it even for 0 ETH. But I'd like to take losses to offset my 2k short term cap gain, because I don't wanna pay taxes for 2k gain when I *lost* money.
Try and view this from the IRS perspective.  I know you're destroying the NFT, but I don't think the IRS will understand.  And that ETH is a separate transaction to the IRS: you sold ETH, and paid taxes on it.  Try and think of paying $4k for the NFT, and ignore that ETH.  That's how I (a layperson) thinks the IRS will view it.

Where do you see NFTs selling for free that are not being bought?  I've browsed NFT marketplaces looking for something under $20 (0.005 ETH), and gave up.  I had hoped to find something I liked in that price range, but most prices were $400 and up.  So if there's someplace selling $0 NFTs, I'd like to browse it.

DaTrill

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Re: Crypto Tax Losses For Illiquid NFTs?
« Reply #9 on: January 06, 2022, 01:41:03 PM »
This is like taking a loss on buying a pack of baseball cards b/c it didn't include a Gem Mint 10 '52 Mantle.   

GuitarStv

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Re: Crypto Tax Losses For Illiquid NFTs?
« Reply #10 on: January 06, 2022, 01:49:15 PM »
I put a quarter in a slot machine and pulled the handle.  How do I harvest a tax loss on this investment?

DaTrill

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Re: Crypto Tax Losses For Illiquid NFTs?
« Reply #11 on: January 07, 2022, 01:48:01 PM »
I put a quarter in a slot machine and pulled the handle.  How do I harvest a tax loss on this investment?

Did you keep the receipt?  Did you use BTC or ETH to buy the pull? 

trollwithamustache

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Re: Crypto Tax Losses For Illiquid NFTs?
« Reply #12 on: January 07, 2022, 02:19:17 PM »
I put a quarter in a slot machine and pulled the handle.  How do I harvest a tax loss on this investment?

Keep putting more quarters in until you trigger a taxable gain event? :)

Telecaster

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Re: Crypto Tax Losses For Illiquid NFTs?
« Reply #13 on: January 13, 2022, 11:00:35 PM »
Hey all, I know a lot of folks in the NFT space that are harvesting tax losses by selling an NFT they bought at low prices.

Example: I bought some NFT at 1 ETH and sell it at .02 ETH (floor's let's say at .03 ETH) to take a tax loss.

This is most ideal, but a lot of times, NFTs are unsellable and have no liquidity.

I am wondering if it's possible to send the NFT to a burn address to trigger a 'sale' (i.e. address==0x0)? For example, if there's no counterparty, I can't take my losses (which are very real):
1. I buy ETH at $2K/ETH.
2. I buy an NFT for 1 ETH when it's at $4K/ETH. This transaction constitutes a 2k short term cap gain that I'll be taxed on.
3. The NFT has no more buyers nor liquidity. No one will buy it even for 0 ETH. But I'd like to take losses to offset my 2k short term cap gain, because I don't wanna pay taxes for 2k gain when I *lost* money.

Has anyone dealt w/ this or anything related to tax loss harvesting for illiquid things?

You probably won't go to jail for this because it is only $2K, but if the IRS finds out they won't be happy.

First, your $2K gain has nothing to do with anything that happens next.  From a tax standpoint, this transaction has nothing to do with any previous transactions. 
If you traded that $2K for hookers and blow, you still realized a gain. 

Here's the part your plan goes off the rails.  Who decided the NTF was worth $4K?  You did.  You bought it after all.  Who decided it was worth zero?  You did. "So," the IRS lawyers ask, "how do we know the value was actually zero?"  The only evidence is your fake transaction.