Seeing your crypto portfolio drop in value can be discouraging, especially when tax season arrives, and you still owe capital gains tax. The good news is that you can use those losses to your advantage. Crypto tax loss harvesting allows you to sell underperforming assets to offset your gains and lower your taxable income.
By strategically realizing losses, you can reduce your overall tax bill while staying compliant with IRS rules. In this guide, we’ll explain how crypto tax loss harvesting works, when to apply it, and simplify tracking and reporting, can maximize your tax savings.
Understanding Crypto Tax Loss Harvesting
Crypto tax loss harvesting is a simple strategy that helps you reduce your tax bill by using your losses to offset your gains. When you sell a cryptocurrency at a lower price than what you paid, that loss can be used to reduce the taxable gains from other crypto or traditional investments. This process lowers your total taxable income for the year and can save you money during tax season.
After selling, you can choose to buy back the same asset at a lower price to maintain your investment position. However, you must follow IRS guidelines carefully to stay compliant. Many US investors use this strategy at the end of the year to reduce their taxes while keeping their long-term crypto investments intact.
Also Read: Crypto Tax In USA- Ultimate Tax Guide
How To Tax Loss Harvest Crypto In The USA?
Crypto tax loss harvesting works by using losses from your crypto investments to reduce the taxes you owe on your profits. Here’s how you can do it step by step:
Step 1: Identify Your Capital Gains
If you sold, swapped, or spent crypto like Bitcoin or Ethereum for a profit, it counts as a capital gain. These gains are taxable under US law.
Step 2: Find Unrealized Losses
Check your portfolio for coins or tokens currently worth less than what you paid. These are unrealized losses that can turn into tax-saving opportunities.
Step 3: Realize the Loss
To make use of these losses, you must sell, swap, or spend the underperforming crypto. This converts the unrealized loss into a realized loss that can offset your gains.
Step 4: Offset Your Gains
Once the loss is realized, use it to reduce your taxable capital gains. This can lower or even eliminate your total tax liability for the year.
Step 5: Rebuy the Crypto (Optional)
After selling, you can repurchase the same asset at a lower price to maintain your investment. Just make sure to follow the wash sale rule, which may soon apply to crypto. It prevents repurchasing the same asset within 30 days if you want to claim the loss.
For Example
Let’s look at a quick example to see how crypto tax loss harvesting works in practice.
Sarah, a crypto investor, bought 1 Bitcoin (BTC) for $18,000 and 1 Ethereum (ETH) for $1,500. A few months later, the price of ETH rose to $4,000, while BTC dropped to $15,000. Sarah decides to sell her ETH at a profit and her BTC at a loss.
Without Tax Loss Harvesting
If Sarah only sells her ETH, she makes a $2,500 gain, which is taxable as a capital gain.
With Tax Loss Harvesting
By selling her BTC at $15,000, Sarah realizes a $3,000 loss. This loss offsets her $2,500 gain from ETH, meaning she owes no capital gains tax for the year.
Note: If Sarah wants to repurchase BTC, she must wait at least 30 days before buying again. This ensures she doesn’t violate the wash sale rule, which could disqualify the loss for tax purposes. |
When To Sell Crypto To Harvest Capital Loss?
Knowing when to sell is key to making crypto tax loss harvesting work effectively. Here are the main factors to consider before deciding to sell your assets at a loss.
1) Use Market Dips to Your Advantage
The crypto market is highly volatile. Smart investors often take advantage of market downturns to sell underperforming assets. Selling during a dip helps offset capital gains and reduces the overall tax burden.
2) Track Realized and Unrealized Gains
A realized loss occurs when you sell, swap, or spend your crypto. An unrealized loss only exists on paper until you take action. You can’t claim a tax deduction until the loss is realized, so timing your sale is essential.
3) Review Your Portfolio Regularly
Monitor your portfolio throughout the year, not just during tax season. By tracking both realized and unrealized gains, you can identify opportunities to harvest losses strategically instead of waiting until the year’s end.
4) Use Tools for Accuracy
Using a portfolio tracker like KoinX can simplify this process. KoinX helps you monitor your crypto performance in real time, track your gains and losses automatically, and identify the best time to harvest losses for maximum tax savings.
Why Should You Tax Loss Harvest Crypto in the USA?
Crypto tax loss harvesting offers several benefits that help investors reduce taxes, improve portfolio performance, and plan long-term savings. Here’s how it can work in your favor.
Lower Your Tax Bill
When you sell a crypto asset at a loss, that loss can offset gains from other crypto or traditional investments. This directly reduces the taxable income you report to the IRS. In the US, you can also offset up to $3,000 of losses against your regular income each year, lowering your overall tax burden.
Carry Losses Forward for Future Savings
If your total losses exceed your gains in a year, you can carry the remaining amount forward to future tax years. This gives you continued tax relief and can help lower your taxable income over multiple years.
Improve Portfolio Health
By selling underperforming assets, you can rebalance your portfolio and invest in stronger opportunities. This not only helps maintain your investment goals but also reduces the tax impact on future gains.
Stay Invested in the Market
Tax loss harvesting allows you to remain active in the crypto market. After realizing your losses, you can repurchase similar assets to maintain your exposure while still benefiting from tax reductions.
Risks Of Crypto Tax Loss Harvesting In USA
While tax loss harvesting crypto can lower your tax bill, it also carries certain risks that you should understand before applying this strategy.
High Transaction Fees
Frequent buying and selling of crypto can lead to high transaction costs. Some exchanges charge up to 4% per trade, which can eat into your savings. Always compare potential tax savings against these costs before selling.
Larger Future Tax Bills
Selling your crypto at a loss reduces your cost basis. If you later sell the same asset at a higher price, your future capital gains tax may increase. This can reduce the long-term benefit of the current tax savings.
Missed Market Recoveries
If you sell during a market dip to harvest a loss, you might miss out on potential price rebounds. Once sold, there’s no guarantee you’ll be able to repurchase the same asset at a similar low price.
Possible Regulatory Changes
The IRS may impose new rules, such as extending wash sale restrictions to crypto assets. If this happens, your ability to use tax loss harvesting could be limited. Stay updated on IRS regulations to ensure compliance.
Limitation Of Crypto Tax Loss Harvesting In The USA
While crypto tax loss harvesting can be an effective tax-saving tool, there are a few limitations you should keep in mind before applying this strategy.
- Offset limit on ordinary income: In the US, you can only use up to $3,000 of capital losses per year to offset regular income. This cap applies to both crypto and traditional investments.
- Unlimited offset for capital gains: There’s no limit on how much loss you can use to offset capital gains. You can offset your entire gain if your losses match or exceed it.
- Carry forward unused losses: If your total losses exceed your annual limits, you can carry the remaining amount forward to future years without expiration.
- Record-keeping is essential: You must maintain clear records of all transactions, including purchase and sale dates, to prove the legitimacy of your claimed losses.
- Wash sale rule may expand: Although it doesn’t currently apply to crypto, the IRS may extend this rule in the future. This could affect how and when you can harvest losses.
Which Accounting Method To Use To Get The Most Of Tax Loss Harvesting?
Choosing the right accounting method is key to getting the most benefit from crypto tax loss harvesting. In the US, the IRS allows several methods for calculating your cost basis, and each one affects how much tax you pay on your crypto gains or losses.
FIFO (First In, First Out)
Under FIFO, the first crypto you buy is considered the first one you sell. If your older assets have grown in value, this method can lead to higher taxable gains since earlier purchases often have lower costs.
LIFO (Last In, First Out)
LIFO assumes that the most recent crypto you bought is the first one you sell. This method can reduce your taxable income if your latest purchases were at higher prices, as it records smaller profits or larger losses.
HIFO (Highest In, First Out)
HIFO prioritizes selling the most expensive crypto you own first. This strategy can help you realize the largest possible losses, making it a great option for investors who want to maximize tax savings through tax loss harvesting.
Note: KoinX lets you experiment with different cost basis methods and instantly see how each one affects your tax outcome before filing. |
How Often Can You Tax Loss Harvest?
Crypto tax loss harvesting isn’t restricted to a single time each year. While most investors do it at year-end, you can apply it throughout the year to take advantage of market dips and volatility.
Year-End Tax Review
Many investors review their portfolios toward the end of the financial year. This helps them identify unrealized losses that can be used to offset gains before filing taxes. It’s a common and effective time to apply tax loss harvesting.
Throughout the Year
You can also harvest losses several times a year whenever the market drops. Regular tracking helps you spot new opportunities to offset gains early, rather than waiting for the last minute.
Tax Loss Harvest From NFTs
Just like crypto, NFT tax loss harvesting can help lower your taxable gains when your digital collectibles lose value. Here’s how to approach it correctly and stay within IRS rules.
Selling NFTs That Have Lost Value
If your NFTs have dropped significantly in price or become worthless due to low demand, you can sell them to realize a capital loss. This loss can offset other crypto or NFT gains, reducing your overall tax liability. Platforms such as Unsellable NFTs make it easier to sell illiquid or worthless tokens so that you can still claim the loss legally.
Avoid Self-Selling or Selling to Friends
Selling your NFTs to yourself or someone you know can invalidate the transaction. The IRS may reject such sales, and you could lose your ability to claim the loss. Always use a verified, independent marketplace when selling NFTs for tax purposes.
Be Aware of NFT Uniqueness
Unlike cryptocurrencies, each NFT is unique and cannot be repurchased once sold. Before selling an NFT for tax loss harvesting, make sure the short-term tax benefit outweighs the potential loss of a valuable or rare digital asset.
What Is The Deadline Of Crypto Tax Loss Harvesting In the USA?
Timing is everything when it comes to crypto tax loss harvesting. To make your losses count for the current tax year, you must complete all qualifying transactions before the official IRS deadline.
Event | Deadline | Purpose |
Realize Crypto Losses | December 31 | You must sell, swap, or spend your crypto before this date to claim the loss for the current tax year. |
File Tax Return | April 15 (Next Year) | The final date to report your gains and losses to the IRS for the previous year. |
Tax Year Period | January 1 – December 31 | The official financial year used for calculating US crypto taxes. |
Note: If you sell your crypto or NFTs after December 31, the transaction will count toward the next tax year. Missing the deadline means you’ll have to wait another year to claim the loss and offset future gains. |
How Can KoinX Help With Crypto Tax Loss Harvesting?
When it comes to crypto tax loss harvesting, accuracy and timing make all the difference. KoinX simplifies both by automating your tax calculations, portfolio tracking, and reporting, ensuring every transaction is accounted for under IRS rules.
Automatic Portfolio Syncing
KoinX connects with over 800+ exchanges, wallets, and blockchains, allowing you to sync your entire crypto portfolio in minutes. Once linked, the platform automatically fetches your transaction history, including buys, sells, swaps, and transfers — ensuring no gain or loss goes unnoticed.
Real-Time Gain and Loss Tracking
The real-time portfolio tracker helps you monitor both realized and unrealized gains across all your assets, including crypto and NFTs. This makes it easier to identify which tokens or collectibles can be sold for tax loss harvesting before the year-end deadline.
Flexible Cost Basis Options
You can choose between FIFO, LIFO, or HIFO accounting methods to suit their investment goals. The platform automatically applies the correct cost-basis method for US users while allowing customization for advanced tax planning.
Audit-Ready Tax Reports
With just a few clicks, KoinX generates IRS-compliant tax reports that include detailed capital gains, losses, and income summaries. These reports can be directly shared with your tax professional or uploaded during your annual filing.
NFT Tax Tracking
KoinX also supports NFT transaction tracking. Whether you’ve sold collectibles on OpenSea or earned royalties from digital art, KoinX captures these activities to calculate the exact gains or losses for NFT tax loss harvesting.
Don’t leave potential tax savings on the table. Use KoinX today to automate your crypto tax loss harvesting, identify real-time loss opportunities, and stay fully compliant with the IRS.
Conclusion
Crypto tax loss harvesting is a practical and legal way to reduce your tax burden by offsetting capital gains with losses. With the right timing and strategy, investors can turn market dips into valuable tax-saving opportunities while staying compliant with IRS rules.
Instead of tracking every trade manually, tools like KoinX automate the process. Start simplifying your crypto taxes with KoinX today to identify loss opportunities to generate IRS-ready tax reports.
Frequently Asked Questions
Does The Wash Sale Rule Apply To Cryptocurrencies For Tax Purposes?
Currently, the IRS does not classify cryptocurrencies as securities, so the traditional wash sale rule does not apply. This means you can sell crypto at a loss and repurchase it immediately without losing your tax benefit. However, future legislation may change this, so it’s wise to stay updated and act cautiously.
How Should I Choose Which Crypto Assets To Harvest Losses On?
Focus on assets whose current value is below your purchase price. Prioritise coins showing the largest unrealised losses and consider selling short-term positions, as they’re taxed at higher rates. Always account for transaction fees, liquidity, and your long-term investment plans before deciding which crypto assets to harvest.
Does Harvesting Losses Reset My Holding Period For Future Gains?
Yes. When you sell a crypto asset to realise a loss and then repurchase it, your holding period and cost basis reset from the new purchase date. This can affect whether future gains qualify for long-term capital gains tax rates, so always weigh this trade-off before harvesting losses.
Can Losses From Cryptocurrency Offset Gains From Other Assets?
Yes. Under US tax rules, capital losses from crypto can offset gains from any other investments, including stocks or bonds. After offsetting capital gains, up to $3,000 of excess losses can reduce your ordinary income, while remaining losses can be carried forward to future years for tax relief.
Who Benefits Most From Employing Crypto Tax Loss Harvesting?
Investors in higher tax brackets or those with large taxable gains benefit the most. Harvesting losses can meaningfully reduce their overall tax burden. Active traders and diversified investors also gain advantages, as frequent transactions across multiple assets create more opportunities to offset gains strategically and improve tax efficiency.
