Crypto Tax-Loss Harvesting
"In equities, the wash sale rule forces you to sit out 30 days. In crypto, you can sell BTC at a $50K loss, buy it back two minutes later at the same price, and pocket a $50K deduction. The IRS knows. Congress keeps trying to fix it. Until they do — harvest."
The 60-second pitch
The IRS treats cryptocurrency as property, not a security (Notice 2014-21). The wash sale rule of §1091 applies only to "stock or securities" — which cryptocurrency is not. Therefore, the 30-day-before-or-after buyback restriction that crushes equity tax-loss harvesters does not apply to crypto under current law.
The practical implication: you can sell BTC, ETH, SOL, or any other crypto at a loss on Monday, and rebuy the exact same coin thirty seconds later, and the loss is fully deductible. No swap-into-similar trick required. No 31-day cooling-off period. Same position, same exposure, fresh loss on the tax return.
This converts every drawdown in your crypto portfolio into an annual tax shield. Bought BTC at $69K in November 2021, watched it drop to $16K in November 2022? You could have harvested $53K per BTC of loss, rebuying immediately, locking in the loss while keeping your bullish position. Most crypto investors did not — they sat through the bear market with unrealized losses they should have crystallized for tax purposes.
Pending legislation: Build Back Better (2021) proposed extending §1091 to digital assets — passed the House, died in the Senate. The Lummis-Gillibrand Responsible Financial Innovation Act and similar proposals revisit it. The Biden-era Treasury Green Book has repeatedly proposed closing the loophole. Verify current law via WebSearch before relying — this can change in any Congress, and effective dates have varied across drafts.
Until the law changes: harvest aggressively in December, and if you're sitting on big crypto losses mid-year (a flash crash, an exchange blow-up), don't wait — harvest the day of.
Real-world example
The setup. Chris has been buying BTC, ETH, and SOL since 2017. By December 2025, he has:
- 5 BTC at avg cost $52K, current price $42K → -$50,000 unrealized loss
- 200 ETH at avg cost $2,800, current price $2,400 → -$80,000 unrealized loss
- 5,000 SOL at avg cost $95, current price $80 → -$75,000 unrealized loss
- Some long-held BTC at $11K cost basis, current price $42K → $80,000 unrealized gain
He also sold $200K worth of taxable brokerage stock earlier in the year — realized LTCG of $150K. Currently looking at a big tax bill.
The harvest. On December 28, 2025, Chris does the following in 15 minutes on Coinbase + Kraken:
- Sells 5 BTC. Realized loss: $50K. Same minute, places a market buy for 5 BTC. Net BTC position unchanged. Loss locked in.
- Sells 200 ETH. Realized loss: $80K. Rebuys 200 ETH. ETH position unchanged.
- Sells 5,000 SOL. Realized loss: $75K. Rebuys 5,000 SOL.
- Does NOT touch his old low-basis BTC (he wants the appreciation, would just realize $80K gain).
The math. Total realized losses harvested: $205,000. These offset:
- $150K of LTCG from stock sales earlier in year. Saves 23.8% federal (20% LTCG + 3.8% NIIT) + 6% state = ~30% × $150K = $45,000.
- $3K of ordinary income (Chris's W-2 is in 32% bracket). Saves $960.
- Remaining $52K carries forward indefinitely under §1212(b) to offset future gains.
Net result. $45,960 in tax saved this year, $52K of losses banked for the future, and Chris's crypto positions are economically identical to where he started. Crypto exposure: same. Federal tax: $46K lower.
Plus. His new basis is the rebuy price. If BTC rips to $80K next year, his gain will be larger then — but at LTCG rates after a 1-year hold, the future gain costs 15-20% vs. the 30-37% he saved this year. Time-value-of-money strongly favors the harvest.
The step-by-step checklist
- Verify current law. Run a WebSearch in November/December for "wash sale crypto §1091 2025" before you harvest. If Congress has extended §1091 to digital assets with retroactive or current-year effective date, the strategy changes (you'd need a 31-day cooling-off).
- Inventory unrealized losses across all wallets and exchanges. Coinbase, Kraken, Binance.US, Gemini, Strike, BlockFi recovery, plus any DeFi positions and self-custody wallets. Pull cost basis data — most exchanges provide a year-end report.
- Identify your realized gains for the year. Stock, crypto, other capital assets — the harvest offsets gains first before $3K of ordinary income.
- Decide which lots to harvest. Use specific identification where the exchange supports it (Coinbase Pro / Advanced Trade allows lot selection in some interfaces; many don't, defaulting to FIFO). For self-custody, you control lot identification via your tax software (CoinTracker, Koinly, ZenLedger).
- Execute the sell and immediate rebuy. Same exchange or different exchange (slightly faster on the same exchange). Use market orders or tight limits — avoid price-slippage erasing part of the loss.
- Watch for "economic substance" arguments. The IRS could theoretically argue that an instant sell-rebuy with no change in position lacks economic substance. This argument has not succeeded against crypto loss harvesting as of any reported case — but it's a non-zero risk. Defense: Some practitioners suggest a brief gap (24 hours) or rebuying a slightly different lot/exchange to add real-world friction.
- Beware stablecoin swaps. Swapping USDT for USDC is a taxable disposition of USDT — usually creates a tiny realized gain or loss. Don't accidentally create unintended events.
- DeFi positions are still taxable events. Sending crypto to a liquidity pool, wrapping ETH to wETH, swapping on Uniswap — each is a disposition. Plan around these in your harvesting schedule.
- Report on Form 8949 and Schedule D. Every sale, every cost basis, every loss. Most tax software (TurboTax, FreeTaxUSA) supports CSV import from CoinTracker / Koinly.
- Don't try to harvest losses inside an IRA-held crypto position. If your IRA owns crypto, losses inside the IRA aren't deductible — same as any other IRA loss. Save harvesting for taxable accounts.
- Carry forward unused losses indefinitely under §1212(b). Each year, $3K offsets ordinary income; excess carries to the next year.
- Re-harvest mid-year if there's a crash. December is the typical season, but a 30% flash crash in March is a harvest opportunity. The losses don't expire — but you might miss them if you wait for the bounce.
IRS code & authority
- IRC §1091 Wash sale rule. Applies to "stock or securities." Cryptocurrency is property, not stock or securities, per Notice 2014-21. Current law (as of writing): wash sale rule does NOT apply to crypto.
- Notice 2014-21 IRS's foundational crypto guidance: virtual currency is property for federal tax purposes. Gains and losses are capital (if held for investment) or ordinary (if held as inventory). Cost basis tracking required.
- IRC §1211(b) Capital losses of individuals — losses allowed up to gains plus $3,000 of ordinary income ($1,500 MFS).
- IRC §1212(b) Capital loss carryover — net losses beyond $3K carry forward indefinitely, retaining their short-term or long-term character.
- IRC §6045(g) (TCJA-era amendment, 2026 enforcement) Broker reporting requirements extended to digital assets. Exchanges will issue Form 1099-B / 1099-DA reporting basis and proceeds. Aligned reporting closes some practical harvesting tracking gaps.
- Form 1040 Schedule 1 / Digital Asset Question The "Did you receive, sell, send, exchange, or otherwise dispose of any financial interest in any virtual currency?" question on Form 1040 — answer truthfully.
- Pending — Build Back Better §80604 (2021, did not pass) Proposed extending §1091 to digital assets. Effective-date language varied across drafts.
- Pending — Treasury Green Book (FY2024+) Treasury has repeatedly proposed closing the crypto wash sale loophole. Watch annual revenue proposals.
- Economic substance — §7701(o) Codified economic substance doctrine. Could theoretically apply to instant sell-rebuy, though no reported case has applied it to crypto loss harvesting specifically.
Audit risk flags
- Legislative risk. Congress could pass §1091 extension to crypto in any year. Effective dates have ranged from "year of enactment" to "retroactive to date of bill introduction." Defense: Watch legislative tracker monthly during your harvesting window. If a bill moves, accelerate or pause harvesting accordingly.
- Economic substance challenge. While untested specifically, the IRS could argue that an instant sell-rebuy is a "sham" lacking economic substance. Defense: Some practitioners suggest a 24-hour gap, or a different chain/wrapper (e.g., sell BTC, buy WBTC for a day, then sell WBTC and buy BTC — adds real economic risk). Diminishes some loss certainty but reduces audit talking points.
- Cost basis tracking errors. Crypto basis is notoriously hard — DeFi, airdrops, forks, staking rewards each have basis events. Defense: Use specialized crypto tax software (CoinTracker, Koinly, TokenTax) that reconciles across wallets and exchanges. Start tracking from day one.
- Specific lot identification. Without specific ID, your sale is FIFO and may not produce the loss you intended (FIFO might sell your lowest-basis lot first = gain instead of loss). Defense: Use a tax software that lets you select lots, or document the lot identification before each sale (a contemporaneous spreadsheet works).
- Stake / DeFi rewards as ordinary income. Stake rewards are ordinary income at receipt; sale at lower price later is a loss against capital. Don't conflate the two streams.
- Foreign exchange reporting. If you hold crypto on Binance International, Bybit, or other non-US exchanges with > $10K aggregate value, FinCEN 114 (FBAR) may apply. Defense: File FBARs to avoid $10K+ penalties, separate from the harvesting strategy.
- Lost basis on transferred-in coins. Coins you transferred from a wallet to an exchange may have "unknown" basis on the exchange's records. Defense: Reconcile basis at year-end using on-chain history + your buy records.
- State conformity. Most states tax crypto gains the same as federal. A few (CA, NY) have aggressive tracking; some (PA) have quirks on capital loss carryover. Verify.
When NOT to do this
- You have no realized gains to offset and limited ordinary income. Harvesting more than $3K beyond gains just creates a carryover. You may want to harvest only as much as you can use.
- Your position is illiquid. Some altcoins have wide bid-ask spreads. Selling and rebuying could cost 3-5% in slippage, eating most of the tax benefit.
- You're at a 0% LTCG bracket. No federal benefit on the gain side; harvesting loses the cost basis reset benefit.
- Congress just passed wash sale extension to crypto. Verify before clicking. If §1091 now applies and you sell-and-rebuy in a single day, the loss is disallowed.
- You'd be tempted to lock in losses but then sell the rebought position before year-end too. Bookkeeping headache. Multiple events in one year on the same coin can cause cost basis confusion.
- You're aiming to use the loss against ordinary income at low rates. Your $200K of crypto losses only saves $3K × your bracket per year. You'd need 60+ years to drain it. Better use cases: against realized stock or crypto gains, not as a slow ordinary-income drip.
- You're worried about retroactive legislation. If a bill passes mid-year with a retroactive effective date covering your harvest, your loss could be disallowed. Risk has not materialized, but it's non-zero.
- You're in a state that doesn't conform on capital loss carryover. PA, for example, doesn't allow capital loss carryover for state purposes. Your state benefit is single-year only.
Crystallize the bear market. Keep the position.
PilePilot tracks crypto cost basis across exchanges and self-custody wallets, identifies harvestable losses, and warns when pending legislation might close the wash-sale gap. Built for real small businesses — and yes, we read the Treasury Green Book so you don't have to.
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Disclaimer. Educational, not tax advice. Crypto tax law is unsettled and rapidly evolving. The wash sale loophole for crypto exists as of writing but may close in any Congress — verify current §1091 scope before executing. Cost basis tracking across wallets and DeFi is non-trivial; use specialized software. Confirm with a tax professional before harvesting six-figure losses.