Crypto tax loss harvesting is a powerful strategy to reduce your tax burden and make the most of your cryptocurrency investments. The concept is simple: by selling underperforming crypto assets at a loss, you can offset gains from other investments and potentially lower your taxable income.
While this technique is common in traditional investing, the high volatility and unique tax rules of the crypto market make it especially valuable for crypto traders.
In this guide, we’ll explain everything you need to know about crypto tax loss harvesting: how it works, what to keep in mind as a crypto investor in the US, when to use it, and how to track and report your losses. By the end, you’ll have a clear understanding of how to optimize your tax strategy and how Blockpit can simplify the process.
<div fs-richtext-component="info-box" class="info-box protip"><div class="flex-info-card"><img src="https://assets-global.website-files.com/65098a145ece52db42b9c274/650c6f4b151815fb0be48cec_Lightning.svg" loading="lazy" width="64" height="64" alt="" class="icon-info-box"><div fs-richtext-component="info-box-text" class="info-box-content"><p class="color-neutral-800">Understanding crypto tax rules in the US can be challenging. Blockpit simplifies this process by offering a powerful tools to automatically identify tax loss harvesting opportunities in your portfolio and ensure compliance with IRS crypto tax laws. Sign up for free to get started today!</p></div></div></div>
Ready to take control of your crypto taxes? Let’s get started!
Is Tax Loss Harvesting Allowed for Crypto?
Yes, tax loss harvesting is allowed for cryptocurrency in the United States.
The IRS treats cryptocurrency as property, not currency. This means gains or losses from selling or trading crypto are subject to capital gains tax rules, similar to stocks or real estate.
If you sell a cryptocurrency for less than its purchase price, you can claim the loss to offset capital gains or even a portion of your ordinary income, within IRS limits.
<div fs-richtext-component="info-box" class="info-box"><div class="flex-info-card"><img src="https://assets-global.website-files.com/65098a145ece52db42b9c274/650c6f4cef4c34160eab4440_Info.svg" loading="lazy" width="64" height="64" alt="" class="icon-info-box"><div fs-richtext-component="info-box-text" class="info-box-content"><p class="color-neutral-800">Want to learn more about IRS crypto tax rules? Read our popular Crypto Tax Guide for US crypto investors.</p></div></div></div>
What types of gains can be offset by crypto losses?
Cryptocurrency losses can offset several types of gains and even certain types of income. Here’s how:
1. Capital Gains from Cryptocurrency
Crypto losses can directly offset capital gains from other cryptocurrency transactions. For example, if you sell one cryptocurrency at a profit and another at a loss, the loss can offset the gain, potentially reducing or eliminating the capital gains tax you owe.
Example:
Sold Bitcoin for a $10,000 gain.
Sold Ethereum for a $7,000 loss.
Net taxable capital gain = $10,000 - $7,000 = $3,000.
2. Capital Gains from Other Assets
Cryptocurrency losses can also offset capital gains from other types of assets, such as:
- Stocks
- Bonds
- Real estate (excluding primary residences in certain cases)
- Mutual funds or ETFs
Example:
$5,000 gain from selling stock.
$7,000 crypto loss.
Net capital gain = $5,000 - $7,000 = $0, with $2,000 of losses remaining.
<div fs-richtext-component="info-box" class="info-box protip"><div class="flex-info-card"><img src="https://assets-global.website-files.com/65098a145ece52db42b9c274/650c6f4b151815fb0be48cec_Lightning.svg" loading="lazy" width="64" height="64" alt="" class="icon-info-box"><div fs-richtext-component="info-box-text" class="info-box-content"><p class="color-neutral-800">If you have a diversified portfolio, crypto losses can be used to offset gains across asset classes, reducing your total taxable capital gains.</p></div></div></div>
3. Ordinary Income
If your total capital losses exceed your total capital gains for the tax year, you can use up to $3,000 of net capital losses per tax year to offset ordinary income, such as wages, salaries, or business income.
Example:
$7,000 crypto loss, no other capital gains.
$3,000 used to reduce taxable income.
$4,000 loss carried forward to the next tax year.
Carrying Excess Losses to Future Tax Years
What happens if the amount of losses you harvested exceed the amount of gains you can offset or surpass the annual limit for reducing ordinary income in the same tax year?
Excess losses don’t go to waste: the IRS allows you to carry forward the excess losses to future tax years. This provision ensures that large losses continue to reduce your tax burden in subsequent years.
Each tax year, you can use your losses to offset capital gains without any limit on the amount of gains reduced. Additionally, you can deduct up to $3,000 of net losses against your ordinary income (or $1,500 if married filing separately), as explained above.
Any losses exceeding these limits can be carried forward into future tax years.
The losses that are carried over from past years are first applied to offset any new capital gains, followed by up to $3,000 of ordinary income. Any remaining balance continues to carry forward to future years until fully utilized.
Example of carryforward:
Year 1: $15,000 in crypto losses, $5,000 in capital gains.
Offset: $5,000 gains + $3,000 against ordinary income = $8,000 utilized.
Carryforward to Year 2: $15,000 - $8,000 = $7,000.
Year 2: No gains, $3,000 offset against ordinary income.
Carryforward to Year 3: $7,000 - $3,000 = $4,000.
What’s the maximum amount of losses that can be harvested?
There is no maximum limit on the amount of losses you can harvest in a given tax year. But how you can use those losses depends on specific limits:
Capital Gains Offset: There is no cap on the amount of losses you can use to offset capital gains. If your harvested losses exceed your capital gains, you can completely eliminate the tax liability for those gains.
Ordinary Income Deduction: You can deduct up to $3,000 of net losses against your ordinary income annually ($1,500 if married filing separately).
Carryforward for Excess Losses: If your losses exceed both your capital gains and the $3,000 ordinary income deduction limit, the remaining losses can be carried forward indefinitely to future tax years.
When is the Best Time for Tax Loss Harvesting?
Timing is key to making the most of tax loss harvesting. The best time to use this tax optimization strategy depends on your financial situation, but some times and market situations are better suited for it than others.
1. Toward the End of the Tax Year
The end of the calendar year is the most popular time for tax loss harvesting.
As the year closes, you can evaluate your portfolio's performance and identify underperforming assets to sell at a loss.
This timing allows you to offset gains accumulated during the year and reduce your taxable income before filing taxes.
If you have a diversified portfolio, crypto losses can be used to offset gains across asset classes, reducing your total taxable capital gains.
<div fs-richtext-component="info-box" class="info-box protip"><div class="flex-info-card"><img src="https://assets-global.website-files.com/65098a145ece52db42b9c274/650c6f4b151815fb0be48cec_Lightning.svg" loading="lazy" width="64" height="64" alt="" class="icon-info-box"><div fs-richtext-component="info-box-text" class="info-box-content"><p class="color-neutral-800">Tax planning is typically more predictable at year-end since you have a clearer picture of your gains, losses, and overall tax liability. Harvesting losses in December can help you fine-tune your tax strategy before the year ends.</p></div></div></div>
Want to learn more? Read this: 5 End-of-Year Hacks to Reduce Crypto Taxes
2. During Market Downturns
Market downturns provide ideal conditions for tax loss harvesting.
Volatility in the cryptocurrency market often leads to steep declines in asset values.
Selling assets during these periods to realize losses can reduce taxable gains or carry forward those losses to future years.
<div fs-richtext-component="info-box" class="info-box protip"><div class="flex-info-card"><img src="https://assets-global.website-files.com/65098a145ece52db42b9c274/650c6f4b151815fb0be48cec_Lightning.svg" loading="lazy" width="64" height="64" alt="" class="icon-info-box"><div fs-richtext-component="info-box-text" class="info-box-content"><p class="color-neutral-800">If you believe the asset's value will rebound, you can repurchase it after harvesting the loss!</p></div></div></div>
3. Before Regulatory Changes
Tax laws regarding cryptocurrency are always evolving. If the IRS is considering changes, such as introducing a wash sale rule for crypto or revising capital gains tax rates, it may be wise to act proactively.
Harvesting losses before such rules take effect ensures you can capitalize on existing tax benefits.
4. During Portfolio Rebalancing
Rebalancing your portfolio—whether to diversify or adjust your risk exposure—presents another opportunity for tax loss harvesting.
Selling underperforming crypto assets as part of the rebalancing process lets you harvest losses while aligning your investments with your long-term strategy.
5. After Permanent Losses or Failed Investments
If an asset is unlikely to recover, such as after a rug pull, a project collapse, or poor investments in highly speculative assets like meme coins, it’s a good time to harvest losses.
Holding onto a near-worthless asset doesn’t provide any financial benefit, but realizing the loss can improve your tax situation.
For example, if you invested in a failed meme coin or a project that turned out to be a scam, harvesting the loss ensures that you extract some financial advantage from a bad investment.
Wash Sale Rules
The wash sale rule in the U.S. is a tax rule that prevents investors from claiming a tax loss if they sell an asset and buy it back within 30 days before or after the sale.
However, this rule doesn’t apply to crypto because the IRS treats crypto as property, not as a security.
So as a crypto investor, you can sell a coin at a loss, buy it back right away, and still claim the loss on your taxes.
<div fs-richtext-component="info-box" class="info-box"><div class="flex-info-card"><img src="https://assets-global.website-files.com/65098a145ece52db42b9c274/650c6f4cef4c34160eab4440_Info.svg" loading="lazy" width="64" height="64" alt="" class="icon-info-box"><div fs-richtext-component="info-box-text" class="info-box-content"><p class="color-neutral-800">This creates a useful tax-saving opportunity, but it’s important to stay updated since lawmakers have discussed changing the rules to include crypto in the future. </p></div></div></div>
For now, this loophole allows crypto investors to save on taxes while staying within the law.
Other Things to Keep in Mind
Track Everything
Keeping track of dates, purchase prices, sale prices, and transaction fees for each trade is key for accurate crypto tax loss harvesting. The IRS may request an overview of your transactions before accepting your tax filings.
<div fs-richtext-component="info-box" class="info-box protip"><div class="flex-info-card"><img src="https://assets-global.website-files.com/65098a145ece52db42b9c274/650c6f4b151815fb0be48cec_Lightning.svg" loading="lazy" width="64" height="64" alt="" class="icon-info-box"><div fs-richtext-component="info-box-text" class="info-box-content"><p class="color-neutral-800">Blockpit’s Crypto Tax Calculator compiles all of your relevant transactions in an easy-to-understand format that can be shared with your tax filing. </p></div></div></div>
Transaction Fees Matter
Crypto trading often comes with fees, which can significantly impact your profit or loss calculations. Ensure that you account for these fees when determining the actual loss or gain from a trade.
<div fs-richtext-component="info-box" class="info-box protip"><div class="flex-info-card"><img src="https://assets-global.website-files.com/65098a145ece52db42b9c274/650c6f4b151815fb0be48cec_Lightning.svg" loading="lazy" width="64" height="64" alt="" class="icon-info-box"><div fs-richtext-component="info-box-text" class="info-box-content"><p class="color-neutral-800">Blockpit automatically detects and categorizes fees to accurately reflect your true gains and losses.</p></div></div></div>
Non-Taxable Events and Exemptions
Some transactions, like crypto-to-crypto exchanges or specific types of wallet transfers, may not be taxable in certain jurisdictions. Knowing what counts as a taxable event will help you avoid unnecessary tax planning.
<div fs-richtext-component="info-box" class="info-box protip"><div class="flex-info-card"><img src="https://assets-global.website-files.com/65098a145ece52db42b9c274/650c6f4b151815fb0be48cec_Lightning.svg" loading="lazy" width="64" height="64" alt="" class="icon-info-box"><div fs-richtext-component="info-box-text" class="info-box-content"><p class="color-neutral-800">Blockpit supports the specific crypto tax rules the US to provide fully compliant and ready-to-file crypto tax reports.</p></div></div></div>
How To Report Crypto Losses on Your Tax Return
Crypto losses are reported on your tax return using the following forms:
Form 8949
List all your crypto transactions, including details of each sale or trade, and whether the loss is short-term or long-term.
Schedule D (Form 1040)
Summarize your total capital gains and losses from Form 8949. This is where you'll calculate your net capital loss and determine how much can offset your gains or ordinary income.
Learn more about it here: How to report crypto on your tax return
Crypto Tax Loss Harvesting Software
Blockpit makes tax loss harvesting simple and efficient, with an average of $2,395 in identified tax-saving opportunities!
With our powerful tax optimization feature, you can easily identify opportunities to harvest losses and reduce your tax liability. Our tool automatically scans your portfolio to highlight underperforming assets that could be sold for a tax benefit, saving you hours of manual analysis.
Don’t leave money on the table! Create your Blockpit account today and see how much you could save.