Crypto tax-loss harvesting is a strategy in which investors sell cryptocurrency assets at a loss to offset capital gains and reduce taxable income. Crypto’s volatility creates both opportunities and risks. By harvesting losses strategically, investors can minimize their tax burdens while maintaining long-term investment potential.
Benefits and Risks of Crypto Tax-Loss Harvesting
There are several advantages and drawbacks to crypto tax-loss harvesting.
Benefits:
- Lowers your tax bill by offsetting gains with losses, reducing your taxable income.
- Optimizes your investment portfolio by selling underperforming assets and reinvesting in more promising options.
- Allows you to carry forward losses to offset future gains or ordinary income, providing long-term tax relief.
Risks:
- Lost future gains if the crypto rebounds.
- Improper execution can lead to disallowed deductions and penalties.
- Overharvesting losses can result in an unbalanced investment portfolio, possibly limiting future growth potential.
- Transaction fees may diminish the tax savings, especially if frequent trades are made to realize losses.
Taxable and Non-Taxable Crypto Events
Cryptocurrency is considered property for IRS tax purposes and is subject to capital gains tax. This means crypto sales, trades, and conversions trigger taxable events. However, simply holding crypto, transferring it between your wallets, gifting it, or donating it doesn’t create a taxable event.
Additionally, certain crypto activities are considered taxable ordinary income rather than capital gains. These include receiving crypto as payment for goods or services, mining rewards, airdrops, or staking rewards.
Understanding these distinctions is crucial when planning tax-loss harvesting strategies. Our team of expert cryptocurrency CPAs can help you navigate these complexities to ensure you properly categorize crypto events.
Capital Gains and Losses Explained
Capital gains occur when you sell crypto for more than its purchase price, while capital losses happen when you sell for less. The IRS further categorizes these into short-term and long-term based on the holding period—which starts the day after you obtain the crypto and ends on the day you dispose of it (see Question 29).
These holding periods are taxed at different rates:
- Short-term gains (assets held for a year or less) are taxed as ordinary income, with rates up to 37%.
- Long-term gains (held over a year) qualify for lower tax rates between 0% and 20%.
Understanding the distinction between short-term and long-term gains is crucial for tax-loss harvesting.
How to Implement Crypto Tax-Loss Harvesting
Effectively implementing tax-loss harvesting requires a strategic approach.
- Evaluate Your Crypto Portfolio: Review all your cryptocurrency holdings to determine each asset’s original purchase price (cost basis), purchase date, and current market value.
- Identify Assets With Unrealized Losses: Pinpoint cryptocurrencies that are currently valued below their purchase price, indicating potential losses.
- Execute Strategic Sales: Sell some or all of the identified underperforming assets to realize capital losses. Here’s where understanding short-term vs. long-term holding periods becomes crucial. Short-term losses are often more valuable because they offset higher-taxed short-term gains.
- Reinvest Proceeds: If you believe in the asset’s long-term potential, you can buy it back immediately since crypto isn’t subject to the wash-sale rule (yet). Alternatively, consider reinvesting in different assets to maintain portfolio balance.
- Maintain Comprehensive Records: Keep detailed documentation of all transactions, including dates, amounts, and the rationale for each trade, to support your tax filings.
- Claim Your Crypto Losses at Tax Time: Report your losses on your tax return using Form 8949 (Sales and Dispositions of Capital Assets). Here’s how:
- Match Losses to Gains: There is no limit on how many capital gains you offset with capital losses. However, short-term losses must first offset short-term gains, while long-term losses should offset long-term gains. Any remaining losses can then be applied to the opposite category.
- Offset Crypto Gains: Losses can be applied to any gains from other crypto transactions in the same tax year.
- Offset Other Capital Gains: You can use crypto losses to offset gains from other investments, such as stocks or real estate.
- Deduct Against Ordinary Income: If total capital losses exceed your total capital gains, you can deduct up to $3,000 ($1,500 if married filing separately) from your ordinary income, such as wages or business earnings.
- Carry Forward Excess Losses: If you have losses beyond the annual $3,000 limit, you can carry them forward indefinitely to offset future capital gains and/or ordinary income in later tax years.
The Impact of Cost Basis on Crypto Harvesting
Selling crypto when you’ve bought it at multiple price points can be complex. The cost basis method you choose impacts your taxable gains or losses:
- FIFO (First In, First Out): Sells the earliest purchased crypto first, impacting gains and losses.
- LIFO (Last In, First Out): Sells the most recently acquired crypto first, often reducing taxes in rising markets.
- HIFO (Highest In, First Out): Sells the highest-cost crypto first to minimize taxable gains.
Choosing the most optimal method depends on market conditions and your investment strategy. A crypto tax professional can help determine the best approach for maximizing tax efficiency.
Tools and Strategies for Effective Tax-Loss Harvesting
It’s essential to utilize the right tools and strategies to optimize your tax savings and ensure compliance with IRS regulations with tax-loss harvesting.
Leverage Crypto Tax Software
Tracking cost basis and transaction history is essential for optimizing tax-loss harvesting. Crypto tax software simplifies this process, making it easier to generate accurate reports and ensure compliance with tax laws. We provide tailored crypto tax software implementation services to help streamline your tax-loss harvesting and reporting.
Capitalize on Market Downturns
Market downturns create optimal conditions for tax-loss harvesting. The volatility in cryptocurrency markets often results in significant declines in asset values, presenting an opportunity to sell underperforming assets and lock in losses.
Prioritize Short-Term Losses
Offset short-term gains first, as they are taxed at higher ordinary income rates. Long-term gains have lower tax rates, making short-term loss harvesting more impactful.
Plan for Future Tax Years
If you expect higher gains next year, harvesting losses now can offset those future liabilities. Carry forward any unused losses to maximize tax savings over multiple years.
Keep Detailed Records
Maintain detailed records of all trades, reinvestments, and tax filings. Poor record-keeping, misunderstanding tax rules, and failing to report transactions accurately can lead to IRS scrutiny.
Consult a Tax Professional
Consulting a crypto tax professional is essential for optimizing your tax-loss harvesting strategy. Our team offers expert services tailored to the unique needs of crypto investors, helping you stay compliant while maximizing savings.
Tax-Loss Harvesting Scenarios
These six scenarios demonstrate how to offset gains and reduce taxable income through tax-loss harvesting.
Scenario 1: Reducing Taxable Gains Using Tax-Loss Harvesting
Emma, a crypto investor, earned $20,000 in Bitcoin gains last year. However, she also had an $8,000 loss from Ethereum and a $4,000 loss from Solana. Emma sold these underperforming crypto assets before the end of the tax year and harvested $12,000 in total losses. This reduced her taxable crypto gains from $20,000 to just $8,000, significantly lowering her tax liability.
Scenario 2: Ongoing Tax Optimization With Quarterly Rebalancing
David is active in the crypto trading scene and follows a quarterly tax-loss harvesting strategy. Every three months, his CPA reviews his portfolio and advises which underperforming crypto assets to sell to lock in losses. This proactive approach allows David to continuously offset his capital gains throughout the year.
Scenario 3: Offset Crypto Losses Across Multiple Asset Classes
Rachel holds a diversified portfolio of stocks, crypto, and real estate. Last tax year, she realized a $11,000 gain from her stock investments and a $7,000 gain from Bitcoin. However, she also lost $29,000 in a failed cryptocurrency.
Rachel harvested the $29,000 crypto loss and:
- Offset the $7,000 Bitcoin gain, reducing her taxable crypto gains to zero
- Applied $11,000 to offset her stock gains completely
- Used $3,000 to offset ordinary income
- Carried forward the remaining $8,000 to offset future capital gains, reducing her taxable income in upcoming years.
By strategically using both current and future tax years, Rachel maximizes her tax benefits and reduces her liability over multiple years.
IRS and Regulatory Considerations
As of 2025, the IRS doesn’t apply the wash sale rule to cryptocurrencies, allowing investors to repurchase sold assets immediately. However, proposed regulations could change at any time, making proactive compliance essential.
All crypto transactions—whether sales, trades, conversions, mining, staking, or using crypto for payments—must be reported to the IRS. Inaccurate reporting can lead to IRS audits and potential penalties.
At Alpine Mar, we stay ahead of evolving crypto tax rules, advising our clients on regulatory updates. We ensure that their reporting strategies remain compliant, efficient, and optimized for tax savings.
Crypto Tax-Loss Harvesting: Your Key to Lower Tax Bills
Crypto tax-loss harvesting allows you to reduce taxable gains while maintaining long-term investment strategies. By selling underperforming assets at a loss, investors can offset capital gains, lower their tax burden, and carry forward losses for future use.
However, tax regulations and reporting requirements add complexity to the process. The choice of cost-basis method, proper categorization of taxable events, optimal timing, and accurate record-keeping all impact the outcome. A CPA with crypto expertise can help you navigate these factors, ensuring compliance and maximizing tax efficiency.
