How to Report Crypto Tax Losses

How to Use Worthless NFTs to Reduce your Crypto Tax Bill

If you’re looking to use worthless NFTs to reduce your crypto tax bill, you can consider tax loss harvesting. This is a strategy where investors realize losses deliberately by disposing of their asset (by selling, swapping or spending it) in order to utilize those losses to offset against gains and reduce their overall tax liability.

In the case of NFTs, which are taxable assets, this means that your NFT can produce both a capital gain or a capital loss. In many cases, NFTs are trading at a loss. This presents a potential opportunity to lower your tax bill. Where your tax bill falls will be dependent on whether you were doing it for business or for investment purposes. That will determine if your taxes will be taxed as business, or the more tax advantaged capital gains.  If in the case of business activity, you are required to keep have properly setup and maintained bookkeeping

However, realizing losses on illiquid NFTs can be difficult because it’s become extremely difficult to realize your loss by disposing of your asset when no one wants to buy your NFT. Fortunately, there are options. You can dispose of your worthless NFT by selling, trading, gifting, or burning it. Remember that those actions will create a taxable tax event

If you’re unsure which NFTs are worthless, you can look at the floor price of the NFT collection. A floor price is the lowest price for a given NFT collection. If the floor price has plummeted way below the ATH, it may recover, but it’s often a sign the hype train has run out of juice. You can also look at this in combination with the bid/ask spread to see how liquid the market for your NFT is. In general, the wider the bid/ask spread, the more illiquid the market may be.

Please note that this is not a comprehensive guide to tax loss harvesting. Talk to us before making any decisions that could impact your tax liability. 

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Forte Innovations specialty is in crypto tax accounting, including bookkeeping, controller and CFO services in Canada.