Article originally posted in MVHQ Discord on July 30, 2021 by JakeAndBake. Some information may be outdated.
This isn’t a super sexy topic, but it’s an important one to address. I’ve seen people in this space say things like “you should never sell for a loss”. I get the initial thought process. It’s not fun to lose money on an investment. Plus, you bought that NFT thinking it’ll be more valuable in the future, so maybe we just need to wait a little longer.
However, in my opinion, the mentality of never taking a loss is dangerous and it puts artificial constraints on how you can deploy your capital. Sometimes investments just don’t work out how you originally thought and you have to cut ties. Also, enforcing rules on yourself like “I will never sell this NFT for a loss” will result in limiting your decision-making. It’ll prevent you from capitalizing on opportunities that you otherwise could have.
The most common reasons that I sell my NFTs at a loss are: liquidity, RNG, & tax-loss harvesting.
Staying liquid is incredibly important in the current NFT environment. There are new opportunities to spend your money on everyday. Anyone who’s been in this Discord for more than 24 hours is well aware of this. I always make sure to have some ETH sitting in my wallet ready to be deployed and I always have a good portion of my NFTs listed for sale in order to constantly replenish my balance. And yes, some of those I am taking a loss on.
When deciding to take a loss, I ask myself: “What has more potential value? This NFT or the upcoming opportunity that I can buy into with the sale of this NFT?”
For example: Say I bought a rare-trait Bulls on the Block for 1 ETH. I thought this was a good investment at the time, but the market is now stagnant and I would need to list it for 0.7 ETH in order for it to sell. There’s an upcoming Art Blocks drop that I believe I can flip in less than 24 hours for 1.5-2x, but I don’t have enough ETH in my wallet. Do I think this Bull will appreciate 1.5-2x in value over the next 24 hours? No? Okay, then I’ll sell the Bull for a loss and use the funds to get in on the Art Blocks drop where I hopefully can make a solid profit.
If I still am a long-term believer of Bulls on the Block, I can always buy a similar Bull back after the Art Blocks flip and now I also have the ETH profit to deploy for the next opportunity.
Random number generation (RNG) is a process where a sequence of numbers is generated to determine a random event. In NFT world, this is applied to the minting process of all these generative projects that we know and love. There’s a bunch of possible trait combinations that have a certain % chance of being applied to the NFTs you mint.
The more NFTs from the collection you mint, the higher chance at hitting a rare. In a perfect world, the floor price of a collection is above your mint price and everything you mint will be profit. However, a lot of the time this isn’t the case. But, if you hit on a rare or two, it can make up for all the other mints.
Say you mint 10 NFTs at 0.05 ETH each and floor drops to 0.04 ETH. You get one rare that you can sell for 0.3 ETH, but the other nine are floors that you offload at a 0.01ETH loss. Yes, you took a loss on most of your collection, but the one rare still allowed you to profit from the minting.
Note: This section applies to US taxpayers. I don’t know the tax laws of other countries. The IRS has yet to release official guidelines as to how NFTs will be taxed. For now, they are treated as collectibles and subject to capital gains tax. I am not a tax professional.
For those unfamiliar, tax-loss harvesting is selling a security at a loss to offset a capital gains liability. It is commonly employed in the stock market world, but also applies to NFTs.
Tax-loss harvesting can be used to lower the amount you owe in taxes from buying/selling NFTs. How so? Well, if you have made a significant profit/expect to make a significant profit during the calendar year, then you have to pay capital gains taxes on that. However, selling for a loss can reduce the amount of taxes you’ll owe.
Here’s an example of how I’ve employed it this year: I was lucky enough to get into Top Shot early on and make a good chunk of change. Let’s say I was able to sell some of my collection for a $20k profit. If I have to pay a 25% capital gains tax on that $20k, then I’ll owe $5k in taxes.
Now, Top Shot has seen a significant fall from it’s peak and people started moving their attention to other NFTs. I wanted to sell some of my moments so I can free up money to spend on various animal jpegs. I got over 1,000 moments, how do I choose which ones to sell? Well, I looked on MomentRanks to see which ones I would be selling for the biggest loss and chose those.
Let’s say I sold for a $10k loss on these moments. I previously had a $20k profit in this calendar year, so now my new total profit is $10k. 25% tax on $10k is $2,500. I now owe $2,500 less in taxes. Had I chosen to sell moments for no gain, instead of a $10k loss, then my taxable profit for the year would still be at $20k. Meaning at a 25% tax rate, I would still owe $5k in taxes.
Again, I am NOT a tax professional. The tax rate used is hypothetical. If there are any tax professionals in here, then feel free to correct me if I am mistaken on any of this.
I’m hoping this post helps you all reframe the idea of what it means to sell for a loss and gives you extra tools in your decision-making process.