Until clarity is provided on if and how the IRS expects traders to realize losses on illiquid tokens, NFT tax-loss harvesting will remain one of the murkiest areas of crypto taxes, TokenTax's zac_tweet writes. Opinion TaxWeek, sponsored by koinly
) investors. Between market constrictions, rug pulls and failed projects, many buyers are left holding assets that represent a considerable unrealized loss.
Crypto tax platforms, portfolio trackers and NFT valuators are rising to meet the challenge, allowing investors to get a better idea of the losses they could expect to lock in from the sale of underwater tokens. So how do you legally realize a loss on a worthless NFT? The Internal Revenue Service says one must sell an asset in an “arm’s length transaction.” This means a trade in which both parties are acting independently, in their own best interest and without any pressure from one another. Typically, this would mean that the involved parties have no prior relationship. Selling a token on an exchange is an example of an arm’s length transaction.
Other would-be tax-loss harvesters have set up reciprocal services. While the details of these arrangements vary, the basic idea is “you pay me 0.001 ETH for my worthless NFT and I’ll pay you 0.001 ETH for yours.”
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