Crypto Tax-Loss Harvesting: How It Works

Crypto tax-loss harvesting is the practice of selling cryptocurrency at a loss to offset capital gains elsewhere in your portfolio — and, once gains are covered, up to $3,000 of ordinary income per year. Because the IRS treats crypto as property, every disposal is a taxable event, and realized losses are a legitimate way to lower your tax bill.

Why crypto losses are valuable

When you sell, swap, or spend crypto, you realize a capital gain or loss equal to the difference between your proceeds and your cost basis. Gains are taxable; losses can be used to cancel them out. This flows directly from the fact that crypto is taxed as property, not currency. Harvesting simply means intentionally realizing losses at a favorable time so they do useful work on your return.

The netting rules follow a specific order:

• Short-term losses (assets held one year or less) first offset short-term gains, which are taxed at higher ordinary rates.
• Long-term losses (held more than a year) first offset long-term gains.
• Any remaining loss in one category then offsets net gains in the other.
• If losses still remain, you can deduct up to $3,000 against ordinary income ($1,500 if married filing separately).
• Anything left over carries forward indefinitely to future tax years.

Does the wash sale rule apply to crypto?

The wash sale rule disallows a loss if you buy a "substantially identical" security within 30 days before or after the sale. As of 2026, this rule is written to cover securities — and crypto is classified as property, not a security. That means the traditional wash sale rule does not currently apply to most cryptocurrencies, so in principle you could sell a coin to harvest the loss and rebuy it shortly after.

Two important cautions. First, Congress has repeatedly proposed extending the wash sale rule to digital assets, so treat this as a rule that could change; don't build a strategy that only works if it never does. Second, tokens that function as securities may be treated differently. When you're uncertain, talk to a professional.

Per-wallet cost basis changes the math

Starting with the 2025 tax year, the IRS requires cost basis to be tracked on a per-wallet (per-account) basis rather than pooled across everything you own. That matters for harvesting because your gain or loss on a specific sale depends on the basis of the units in that particular wallet or exchange account.

If you hold the same coin in several places, you can't cherry-pick a low-basis lot from one account to sell out of another. Choosing which specific units to sell — and doing the accounting correctly across wallets — is exactly where mistakes creep in. Good software that tracks basis per wallet is close to essential here.

Form 1099-DA and better records

Brokers began issuing Form 1099-DA for the 2025 tax year to report digital asset proceeds. Over time these forms will include cost basis too, which makes it easier to see your unrealized position — but exchange-reported figures don't always capture transfers, DeFi activity, or on-chain history. Reconcile 1099-DA against your own complete records before you harvest. If you're a Coinbase user, our guide to Coinbase tax documents walks through what those forms cover.

A practical harvesting workflow

• Import everything first. Pull in all wallets and exchanges so cost basis and holding periods are accurate before you make any moves.
• Identify underwater lots. Look for positions trading below their per-wallet basis, and note whether each is short- or long-term.
• Match losses to gains. Prioritize harvesting to offset high-rate short-term gains, then long-term gains, then the $3,000 income deduction.
• Watch your holding periods. A lot that's about to cross the one-year mark may be worth handling differently.
• Document the disposal. Record the date, proceeds, basis, and the specific units sold.

Don't forget earned crypto

Harvesting only addresses capital gains and losses. Crypto you earn — from staking, mining, airdrops, or payment for services — is ordinary income at its fair market value when you receive it, and capital losses can't offset that ordinary income beyond the $3,000 annual limit. Keep the two buckets separate as you plan. For more strategy ideas, browse our tax strategy hub or the crypto tax basics guides.

This article is general information, not tax advice. Consult a qualified professional about your specific situation.