Stuck at an impasse in negotiations, the Nuggets have chosen to pass on a Peyton Watson contract extension.

At the very least, they needed to make sure they didn’t lose their top priority of the offseason for nothing in return.

The Nuggets are sending Watson to Cleveland for a 2031 first-round pick and a 2032 second-rounder, two league sources told The Denver Post on Wednesday, confirming a report by ESPN’s Shams Charania. Watson has agreed to a four-year, $88 million contract with the Cavaliers as part of a multi-team sign-and-trade that won’t be officially completed Wednesday night, as it grows to include other transactions around the league, according to a Nuggets team source.

Cleveland is sending Max Strus to the Clippers and Tre Mann to the Wizards, while Washington sends Cam Whitmore to Cleveland and Julian Reese to Denver, according to Charania. Reese, who was on a two-way contract, will be waived.

Essentially, the Nuggets aren’t getting any players back, leaving them with two open roster spots and a payroll about $2 million over the second apron. The crux of the deal for Denver is the draft compensation, picking up one trade-eligible first-round pick. The 2032 second-round pick acquired in the trade is Sacramento’s.

By not taking any salary back in the trade despite their urgent championship window with Nikola Jokic entering a potential contract year, the Nuggets have signaled their intent is to avoid an astronomical luxury tax bill next season — and possibly to shed even more salary and evade the second apron. Retaining Watson without a subsequent cost-cutting trade would’ve resulted in a record tax bill.

Watson became a restricted free agent on June 30 with the expiration of his four-year, rookie-scale contract, meaning the Nuggets had the ability to retain him by matching any offer sheet he might’ve received from an outside suitor.

That gave them negotiating leverage when no such offer arrived at Watson’s doorstep during the busiest weeks of free agency. It’s rare for lucrative offer sheets to be extended in the NBA, and even rarer for them to go unmatched. When Warriors center Quentin Post joined Memphis last month for three years and $30 million, he became the first restricted free agent to depart his team for an offer sheet since Bogdan Bogdanovic in 2020.

More commonly, sign-and-trades function as a release valve for teams that can’t agree on a salary range with their restricted free agents. Watson’s camp, according to a league source, was seeking well north of $20 million per year, an average annual value that Denver didn’t feel comfortable meeting despite Watson’s breakout fourth season. The 6-foot-8 wing averaged 14.6 points, 4.9 rebounds and 2.1 assists on 49.1% shooting and 41.1% from 3-point range.

Most of his production occurred in a key four-week stretch when the Nuggets were missing Jokic, the central hub of their offense. They were in dire need of shot creation off the dribble, and Watson stepped up, averaging an efficient 22.5 points over 17 games. But shortly after Jokic returned, Watson suffered a hamstring strain on Feb. 4 in New York.

He missed the remainder of the season except for a five-game stint in which he tried to return but was physically limited. He didn’t play in Denver’s playoff series against Minnesota, a six-game defeat.

The Nuggets drafted Watson with the 30th overall pick out of UCLA in 2022. He was a member of their 2023 championship team, though he spent most of that season developing in the G League. Denver chose to prioritize his fellow 2022 draftee, Christian Braun, when both players were eligible for a contract extension last preseason. Braun signed a five-year, $125 million deal. Watson went into a contract year staring down an uncertain future.

“From what I understand, it was just a financial business decision (for the Nuggets). Obviously, with the new CBA and the second apron, things of that nature, they wanted to stay out of that,” Watson told The Denver Post at the time. “As a business, you’ve gotta operate (based on) what’s best for your business. And when it comes time for me to make my decision next summer, I’ve gotta operate as a business myself. That’s no diss to the Nuggets. That’s no diss to the Kroenkes.”

“If he has a great year, he can put himself where he wants to,” Nuggets coach David Adelman said before opening day last October. “That’s what our league is about. You prove it every day. You prove it every year. … He can set his market, and I think he will.”

Watson’s best pro season coincided with Braun’s worst. As the 23-year-old gradually assumed a larger role, he hired Klutch Sports and superagent Rich Paul to represent him in restricted free agency. The Nuggets signaled to other teams that they were prepared to match any offer sheet for Watson, hoping to scare away a market that was already thin. The Nets, Bulls, Lakers and eventually the Clippers were the only teams with the available cap space to seriously threaten Denver.

None of them came forward in recent weeks. As contract negotiations between Watson and Denver stalled, the Nuggets began to explore the sign-and-trade market, a league source told The Post. They felt comfortable with the possibility of an extended negotiation if no suitable trades materialized. The team already has heavy financial investments in Jokic, Jamal Murray and Aaron Gordon. Signing Watson for the contract he received from Cleveland would’ve caused Denver’s 2026-27 roster payroll to spike more than $20 million into second apron territory, where the Kroenkes have never ventured before this offseason.

Watson ends his tenure with the franchise that drafted him having played 225 games. He started 64 of those games and also appeared in 29 playoff contests.

After developing from a late first-round pick into a viable rotation player, the Nuggets have transformed him back into a future first-rounder, plus a second-round footnote — trade assets that could be used much sooner than the 2030s.

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