2024-2025 Crypto Tax Loss Harvesting Guide

tl;dr — CoinTracker assists you in reducing your tax bill with our Tax Loss Harvesting Tool (available with a Prime or Ultra subscription plan)

As you may have seen in CoinTracker's 2024 Crypto Tax Guide, for most people, the largest expense over the course of a year is not their rent, housing, car payment, or food. It’s their tax bill.

Tax loss harvesting is a compelling form of tax planning that allows people to offset their tax expenses by selling assets at a loss before the end of the calendar year. When it comes to cryptocurrency, it’s a low-effort way to sometimes save tens of thousands of dollars in under an hour, all while maintaining your existing portfolio.

What is tax-loss harvesting?

Tax-loss harvesting allows investors to reduce their tax liabilities by offsetting gains with losses. It's effective for both traditional securities and cryptocurrency investments. It can lower tax bills or serve as a hedge against market downturns, but it requires careful planning and know-how. 

To use tax-loss harvesting, traders sell crypto assets that have decreased in value since purchase to realize a loss, which can offset gains from other investments and lower their overall tax bill. Here are the main steps to apply this strategy:

• Open a taxable investment account: Set up a taxable investment account that allows you to invest in crypto with after-tax dollars. This account type provides the flexibility needed to capture tax-loss harvesting opportunities.
• Invest in assets based on your investment horizon and risk tolerance: To harvest tax losses, you’ll need investments that have declined in value relative to their purchase price. Although your goal is long-term profitability, market fluctuations may lead to some assets decreasing value, enabling potential loss harvesting.
• Sell assets at a loss: Realize losses by selling or disposing of crypto assets that have dropped in value. These losses can offset gains made in the same tax year or reduce overall taxable income.

How to Harvest Crypto Tax Losses?

Let’s say Max saw the price of bitcoin climbing. He purchased 1 bitcoin (BTC) near the top of the market at $62,000 in November 2021. Two years later (November 2023), BTC is trading at $39,000, so Max now has the opportunity to tax loss harvest $23,000 worth of unrealized capital losses.

Here’s how tax loss harvesting works for crypto:

• Cost basis: $62,000 (price Max bought his bitcoin)
• Fair market value: $39,000 (price of bitcoin at that time)
• Harvestable losses: $23,000 (difference between the two)

To harvest the losses, Max needs to dispose of his bitcoin before the end of the tax year (e.g. December 31 in the US). CoinTracker makes this simple with our Tax Loss Harvesting Tool (available with a Prime or Ultra subscription plan). This tool tells users which assets they can tax loss harvest, the wallet the asset is held, the amount to sell, and estimates the maximum loss. (Make sure you resolve any needs review items first or these amounts could be inaccurate.)

Note: Tax-loss harvesting is disallowed in Canada, UK, and some other countries without waiting for a 30-day period after an asset is sold to be re-purchased. In Australia, the ATO has warned against tax loss harvesting without honoring wash sales.

When Should You Tax Loss Harvest Cryptocurrency?

Anytime that the market value of your asset drops beneath its cost basis, there is an opportunity to tax loss harvest and effectively save money on your next crypto tax bill.

CoinTracker makes this easy for you on the Performance page by visualizing your unrealized performance; anytime the all time unrealized return is red (cost basis exceeds the holdings value), you have an opportunity to tax loss harvest.

There are a few simple steps to tax loss harvest your cryptocurrency:

1. Identify the crypto assets you hold at a harvestable loss (available on the CoinTracker tax loss harvesting dashboard)
2. Sell the amount of that asset (can be for fiat, a stablecoin, or any other cryptocurrency)
3. Assuming you would like to maintain the same composition of your portfolio as before, repurchase the same amount of the asset
4. Transfer your assets back to the wallets in which you would like to hold your assets long term
5. Sync your CoinTracker dashboard from the wallets page

What are the benefits and limitations of crypto tax-loss harvesting?

While crypto tax-loss harvesting’s primary advantage is the potential reduction in capital gains taxes owed to the Internal Revenue Service, traders can also offset up to $3,000 of personal income with crypto losses each year if capital losses exceed capital gains. They can carry any unused losses forward to offset future gains in subsequent years, providing a long-term tax benefit.

However, there are limitations and risks associated with tax-loss harvesting. Frequent buying and selling of assets can lead to significant transaction fees, which may reduce the overall benefits. It’s important also to be aware of the "wash sale" rule, which prevents traders from claiming a loss on the sale of a security if they repurchase the same or a substantially identical asset within 30 days before or after the sale.

Factors to consider when tax-loss harvesting

Tax-loss harvesting can be useful for crypto traders aiming to manage tax liabilities and grow their portfolios. However, its effectiveness depends on several factors, such as income levels and investment duration. Successful tax-loss harvesting requires careful planning, thorough record-keeping, and strategic decision-making to maximize benefits.

Here's a look at key considerations for implementing a tax-loss harvesting strategy:

Income considerations 

Tax-loss harvesting benefits high-income individuals the most. Those in lower tax brackets may not gain as much advantage, as they might not owe taxes on capital gains depending on their income level.

Planning ahead

Preparation is key for effective tax-loss harvesting. While traders can implement it anytime during the year, many tax professionals recommend a consistent tax planning approach. This involves regularly reviewing year-to-date taxable income, including capital gains, projecting expected income for the remainder of the year, and assessing asset positions with unrealized losses that could reduce taxable income before year-end. For efficient planning, maintain thorough records of all transactions to ensure accuracy and track opportunities for potential loss harvesting.

Effectiveness across investments

Tax-loss harvesting is especially effective for individual stocks, actively managed funds, and ETFs. In traditional markets, some securities offer easier opportunities for harvesting losses than others. Index fund investors, for example, might find it challenging to use this strategy. Consulting a tax professional can help identify which parts of a portfolio can benefit the most.

Investment duration matters

The duration for which an asset is held impacts the tax rate on gains. The IRS classifies assets, including crypto, as short-term or long-term investments depending on your holding period. Long-term capital gains rates apply to assets held for more than a year, while short-term rates apply to those sold within a year of purchase.

Mindful selling

Don’t sell underperforming assets solely for tax benefits. An asset’s current downturn doesn’t guarantee it will stay down. Many traders buy crypto for its long-term growth potential. If a crypto project's fundamentals remain strong, holding the asset may be more beneficial than realizing a loss. Conversely, a crypto’s fundamentals may have worsened, indicating it may be time to ditch the project.

Reinvestment opportunities

Beyond tax savings, tax-loss harvesting can create the possibility for reinvestment. Many traders use their tax savings to buy more cryptocurrency, leveraging the compounding effect to grow their portfolios and increase overall wealth.

Wash Sales and Cryptocurrency

In the U.S. the IRS has a wash sale rule for securities. It does not apply to Bitcoin since it is not a security, but may apply to other crypto assets that the SEC deems securities. To be extra safe, you can avoid purchasing back the same asset for 30 days if you are not sure if it is a security or not.

In plain English, when you tax loss harvest stocks, you have to wait 30 days to re-purchase anything you sold (in order to claim the loss on your taxes), but this does not apply to any cryptocurrencies that are not securities, such as Bitcoin and Ethereum. This means that you can sell your crypto and instantly buy it back, maintaining the same position you had before while claiming a tax loss. That’s a win-win.

Optimize your crypto tax strategy with CoinTracker

Strategies like crypto tax-loss harvesting can effectively minimize tax liabilities, but they require traders to meticulously record transaction details, including purchase and sale dates and times. Fortunately, CoinTracker streamlines the process. 

With support for 500+ exchanges and wallets, 10,000+ cryptocurrencies, and 20,000+ DeFi smart contracts, CoinTracker captures every crypto transaction. Simply connect your accounts and let us handle the rest.

Start for free and discover why over 2 million traders trust CoinTracker for their crypto tax-reporting needs.

Note: Tax Loss Harvesting must be done before the end of the tax year, which in the United States is December 31. Individual tax lots within a particular coin can have different cost bases, so please ensure you are considering the taxable implications of each trade before executing it. If you are unsure, you can manually add the trade in CoinTracker to see what happens before you actually make the trade.

If you have any questions or comments about crypto taxes, let us know on X @CoinTracker.

CoinTracker integrates with 300+ cryptocurrency exchanges, 8,000+ cryptocurrencies, and makes crypto tax calculations and portfolio tracking simple.

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.