Crypto Tax-Loss Harvesting Strategies
Tax-loss harvesting turns bad trades into tax savings. Since the wash sale rule doesn't apply to crypto (yet), you can sell at a loss, immediately rebuy, and still claim the deduction. No 30-day waiting period.
Calculate your potential savings with the Crypto Tax Calculator.
How Tax-Loss Harvesting Works
- Identify crypto holdings trading below your cost basis
- Sell them to realize the loss
- Use the loss to offset gains (or up to $3,000 of ordinary income)
- Rebuy the same crypto if you want to maintain your position
Example:
| Step | Action | Tax Impact |
|---|---|---|
| Hold 10 ETH (bought at $4,000 each = $40,000) | — | — |
| ETH drops to $2,500 | Unrealized loss: $15,000 | No tax impact yet |
| Sell all 10 ETH for $25,000 | Realized loss: $15,000 | Deductible |
| Rebuy 10 ETH at $2,500 | New cost basis: $25,000 | Immediate |
You still own 10 ETH. Your portfolio position is unchanged. But you now have a $15,000 realized loss on your tax return.
What Losses Can Offset
Capital losses follow a specific offset hierarchy:
| Priority | What It Offsets |
|---|---|
| 1st | Short-term losses offset short-term gains |
| 2nd | Long-term losses offset long-term gains |
| 3rd | Remaining short-term losses offset long-term gains |
| 4th | Remaining long-term losses offset short-term gains |
| 5th | Up to $3,000 of net loss offsets ordinary income |
| Carryforward | Excess loss carries to next year (indefinitely) |
The $3,000 ordinary income offset is valuable — at a 24% bracket, that's $720 in tax savings just from the ordinary income deduction, every year until the loss is used up.
Year-End Harvesting Strategy
December review process:
- List all crypto holdings and their unrealized gains/losses
- Calculate your realized gains for the year so far
- Harvest enough losses to offset those gains
- Consider harvesting extra for the $3,000 ordinary income deduction
- Rebuy immediately (or don't, if you want to exit the position)
| Your Situation | Strategy |
|---|---|
| $20K in realized gains, $15K in unrealized losses | Harvest all $15K to reduce taxable gains to $5K |
| $0 in realized gains, $10K in unrealized losses | Harvest $3K-$10K (use $3K against income, carry rest forward) |
| $50K in gains, $5K in unrealized losses | Harvest all $5K, look for more opportunities |
Advanced Strategies
Continuous Harvesting (Not Just Year-End)
Don't wait until December. Crypto is volatile — a dip in March could recover by December. Harvest during dips:
- January: ETH drops 30% → harvest loss, rebuy
- May: BTC drops 20% → harvest loss, rebuy
- September: SOL drops 40% → harvest loss, rebuy
- December: Review and do final round
Each harvest resets your cost basis lower, so future gains will be larger. But you've locked in deductions now.
Pair With Gains
If you're planning to take profits on a winning position, first harvest available losses to offset the gains:
| Without Harvesting | With Harvesting |
|---|---|
| Sell BTC: +$30,000 gain | Sell BTC: +$30,000 gain |
| Tax (15%): $4,500 | Harvest ETH loss: −$20,000 |
| Net gain: $10,000 | |
| Tax (15%): $1,500 | |
| Saved: $3,000 |
Long-Term vs Short-Term Awareness
If you have both long-term and short-term losses, harvest the short-term losses first. Short-term losses offset short-term gains (taxed at ordinary rates up to 37%), giving you more tax savings per dollar of loss than long-term losses offsetting long-term gains (taxed at 0-20%).
Record Keeping Requirements
For each harvest, document:
- Date and time of sale
- Amount sold
- Sale price per unit
- Total proceeds
- Cost basis per unit
- Total cost basis
- Realized gain/loss
- Date and price of rebuy (if applicable)
- Exchange or wallet used
- Transaction IDs / hashes
Crypto tax software automates this, but keep independent records too.
Pitfalls to Avoid
Don't harvest at a fee loss. If gas fees or exchange fees exceed your tax savings, the harvest isn't worth it. A $200 loss that saves $30 in taxes but costs $50 in fees is a net negative.
Watch for state differences. Some states don't allow capital loss deductions or have different limits.
Don't forget the rebuy cost basis. After harvesting and rebuying, your new cost basis is lower. When you eventually sell for real, your gain will be larger. You're deferring taxes, not eliminating them (though the time value of money makes deferral valuable).
Track across all exchanges and wallets. A loss on Coinbase doesn't help if you have an offsetting gain on Kraken that you forgot about.
Use the Federal Tax Calculator to see how harvested losses affect your overall tax return.
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