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NFTs Are Booming Again – Bull Market Or A Tax Loss Event?

Disclaimer This article is for general information purposes only and isn’t intended to be financial product advice. You should always obtain your own independent advice before making any financial decisions. The Chainsaw and its contributors aren’t liable for any decisions based on this content.

Positive sentiment has been emanating throughout the NFT space this week as floor prices and purchasing statistics indicate the potential of a significant upturn in the fortunes of leading collections.

Collections such as Moonbirds, Doodles, BEANZ, CryptoPunks and Azuki have been on an absolute tear over the past 24-hours, printing 3-digit percentage gains amidst a turbulent macroeconomic market.

Is this a genuine revival of fortunes for the NFT market following a year of bearish activity, or merely a band of degens high on their own supply of good ole’ hopium?

Over the holiday season, a clear trend emerged in which NFT collections with cute animal pics such as Pudgy Penguins and Sappy Seals achieved profound success, their floor prices both reaching all-time highs of 7.1 ETH and 1.65 ETH, respectively.

The consequence was an injection of impetus back into what had become a dampened and melancholic landscape. But suddenly, investors were once again keen to put their money on the table, capitalising on Ethereum’s low price to scoop up new assets.

On December 31st, the sale of CryptoPunk 2066 for 1,155 ETH, equivalent to US$1.38 million, continued the hype train, sparking euphoria throughout the NFTverse.

Over the past 30 days, the NFT space has generated $900 million in revenue, some refer to it as an inflection point in the history of the market, others simply a temporary trend. The truth lies somewhere in between.

Tax Harvesting

As the end of year approaches, investors begin reassessing the performance of their portfolio in preparation to declare their taxable income. One method of reducing this bill is to sell assets in a loss, and thus avoiding the need to pay capital gains tax on them. This is a process known as tax harvesting.

In the US, the majority of tax harvesting occurs during the months of December and January. Assets held for less than a year can be taxed up to 37%, while assets held and sold over that period of time, known as long-term capital gains, can be taxed up to 20%.

The flurry of activity witnessed in the NFT space over the period of December through January could be in part due to this annual tax harvesting event – investors choosing to part ways with their liquid NFT assets over other harder-to-shift items such as real estate and vehicles. 

Sergito.lens argued that this represents a state of “the same ETH being recycled around” from the seller actioning a loss for taxable purposes, to the buyer who picks up an undervalued asset.

Director of Research at Proof Collective, Punk9059 revealed that the number of new wallets making a first NFT transaction were sustained around the 2,000 per-day level, a far way off the merry-heights of 8,000 this time last year.

In conclusion, it seems that although the NFT space has cultivated a collective sense of optimism for the future, quantitative statistics on the influx of new users suggests caution and pragmatism over the near-time.