Losses from NFT lending protocols are tax deductible when they become permanent.
If you lent an NFT on BendDAO, NFTfi, or Arcade and lost it to liquidation, that’s a capital loss. If the protocol failed and your NFT disappeared, that’s also deductible.
When the Loss Becomes Real
The IRS requires losses to be “realized” before you can deduct them.
Liquidation: Deductible in the tax year the liquidation occurred. Your NFT was sold to cover the loan—that’s a sale event.
Protocol failure: Deductible when you can prove the asset is worthless. If the protocol gets hacked or shuts down and your NFT is gone, document the date it became inaccessible.
Impermanent loss from liquidity pools: Not deductible until you withdraw. While your position is down 40%, you haven’t realized the loss yet.
Calculate Your Loss
Your deductible loss equals your cost basis minus what you recovered.
Example: You bought a Doodle for 8 ETH ($12,000). You deposited it as collateral on BendDAO to borrow 4 ETH. The floor crashed, you couldn’t repay, and it got liquidated for 3 ETH.
- Cost basis: $12,000
- Amount recovered: $0 (the 3 ETH went to the lender)
- Deductible loss: $12,000
If you had borrowed 4 ETH ($6,000 at the time) and kept that cash, you still deduct the full $12,000 loss. The loan proceeds aren’t income—you were supposed to repay them.
Documentation You Need
Save these records for each lending transaction:
- Original purchase receipt showing your cost basis
- Lending transaction hash when you deposited the NFT
- Liquidation transaction or protocol failure announcement
- Date and amount of any loan proceeds you received
For protocol failures, screenshot the platform’s shutdown notice and any communication about lost assets. Archive the blockchain transaction showing your NFT was deposited but never returned.
The NFTfi Exception
If you borrowed against an NFT and defaulted intentionally, that’s a sale—not a casualty loss.
You transferred ownership to the lender in exchange for keeping the loan proceeds. Report it as a sale where you received the loan amount.
Example: Borrowed 5 ETH ($7,500) against your Azuki (cost basis: $15,000), then chose not to repay. That’s a $7,500 sale, creating a $7,500 capital loss.
Action Step
Review your NFT lending history before year-end. Calculate losses from any liquidations or protocol failures that occurred this year. Offset them against capital gains or deduct up to $3,000 against ordinary income.
Lost your NFT to a protocol failure this year? Document it now while the evidence is fresh. The deduction could be worth thousands in tax savings.