As the end of the year approaches, NFT traders are finally finding a use for the worthless tokens in their wallets: selling them for pennies to offset the capital gains on their taxes. And with the IRS’s criminal investigation unit reportedly taking a special interest in crypto matters, it could be a better time than ever to offload junk tokens.
The strategy, known as tax loss harvesting, helps traders who are lucky with some investments and unlucky with others minimize their taxable liability, ultimately saving them money. But with so many NFT projects now lifeless or abandoned, who will buy worthless NFTs?
Join projects like Harvest.Art, Unsellable NFTs, and Sol Incinerator, which aim to purchase worthless NFTs to help traders harvest tax losses.
“People like to procrastinate, so most of our volume starts around December 26 and peaks until midnight in the new year,” says pseudonymous developer NetDragon, co-founder of Harvest.
Skyler Hallgren, director of partnerships at Unsellable, pointed out that NFTs were the first step into investing for many individuals, so they may not be aware of strategies like tax-loss harvesting.
“Many of these people are not as savvy when it comes to year-end tax planning as traditional investors. Most traditional investors are… strategic about absorbing tax losses and finding ways to reduce their tax burden. Most Web3 people don’t come from that world,” Hallgren says.
Why buy worthless NFTs?
Each competing service has a slightly different business model to attract customers.
Unsellable pays one cent for each NFT, but also charges a service fee of 0.002 ETH (approximately $4.60 at current rates) for each NFT unloaded, up to a maximum of 0.08 ETH (approximately $184.21) per transaction, excluding gas costs. Users can sell up to 500 NFTs per transaction, from multiple collections at once.
“Most of our users are not looking for another speculative crypto investment; they want to create a very simple, no-nonsense tax strategy for the end of the year,” Hallgren said.
Harvest, on the other hand, pays one gwei (one billionth of one eth) for each NFT sold through the platform and does not charge any upfront service fees. Harvest is also offering one “bidding ticket” in exchange for each NFT sold, allowing users to bid on some of the more than 110,000 NFTs that Harvest owns.
Instead of relying on upfront fees, Harvest hopes to leverage the cyclical nature of the NFT market to make a profit. For example, a Web3 game called KOKODI took so long to release that many users lost hope and lost their NFTs through Harvest. “We had over 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 KOKODI and they began cycling assets back into circulation,” said NetDragon.
The total cost of offloading NFTs may vary. For example, a recent sale of 459 NFTs through Harvest cost approximately $300 in gas fees, not including the gas fee for approving each collection for transfer. A recent sale of 80 NFTs through Unsellable cost about $630, after Unsellable’s capped service fee and gas fee, again not including the gas fee for approving each collection for transfer.
“Midway through the year, we did an analysis of about 900 of our users. I realized that the average user realized a loss of $4,200,” Hallgren said. “I am very confident that there are hundreds of millions of dollars in unrealized losses frozen at this point.”
Both Unsellable and Harvest operate on the Ethereum blockchain, with Harvest also supporting certain Layer 2 networks. Solana is served by Sol Incinerator, while several other chains, including the increasingly popular Bitcoin Ordinals protocol, appear to lack a similar service.
IRS Investigates Crypto Tax Evasion
It may be a better time than ever for crypto traders to consider their tax bills. According to a report in Bloomberg, the criminal investigation division of the Internal Revenue Service (IRS) has begun to look more closely at crypto tax evasion, while just a few years ago most cases involved money laundering.
According to a recent IRS report, the investigations are looking into everything from “…failing to report capital gains from the sale of cryptocurrency, income earned from mining cryptocurrency, or income received in the form of cryptocurrency, such as wages, rental income, and gambling winnings .” The research unit also investigates whether or not individuals disclose their ownership of cryptocurrency in an effort to protect their assets from taxes.