What is tax-loss harvesting?

Selling an asset at a loss to offset realized gains, then deciding separately whether to re-establish the position.

Because losses reduce taxable gains, harvesting can lower a tax bill without changing your long-term exposure much. The rules that constrain it differ sharply by jurisdiction: some apply a wash sale rule that disallows the loss if you repurchase within a window, and whether that rule reaches crypto depends on how the asset is classified locally. Confirm the treatment where you file before acting. See wash sale rule and capital gains.

The technique is ordinary in traditional investing and unusually relevant in crypto, because the constraint that limits it elsewhere is written in terms of stock and securities.

How it works

A loss is not a loss for tax purposes until it is realized. An asset that has fallen and is still held produces nothing you can report. Selling it converts the paper decline into a realized loss that can, subject to local rules, offset realized gains elsewhere.

Three limits decide whether the technique does anything for you.

What losses may offset. Many systems allow capital losses to offset capital gains first, with only a limited amount usable against ordinary income and the remainder carried forward. The details are jurisdiction-specific and are what the tax section records.

Whether repurchasing disallows the loss. In the United States, the wash sale rule in Internal Revenue Code section 1091 disallows a loss where substantially identical stock or securities are reacquired within thirty days before or after the sale. By its terms the section addresses stock and securities, and the Internal Revenue Service treats virtual currency as property under Notice 2014-21. How that intersects is a question for your own adviser, and several other jurisdictions apply their own repurchase windows to crypto explicitly.

Whether the sale is worth its costs. Selling and rebuying costs two rounds of fees plus the spread, and it resets the holding-period clock on the new lot, which matters wherever the rate depends on how long you held.

Example

Illustrative figures. You realized a $10,000 gain earlier in the year. You also hold a position bought for $8,000 that is now worth $3,000. Selling it realizes a $5,000 loss, which offsets half the gain, leaving $5,000 taxable. At a 20% rate that saves $1,000.

The costs to weigh against it: selling and rebuying $3,000 at a 0.40% taker fee each way is $24, plus the spread twice, plus a new lot whose holding-period clock starts today. If a lower long-term rate would have applied to the original lot in two months, resetting that clock can cost more than the $1,000 saved.

Why it matters when you buy

Repurchase rules and holding-period thresholds are jurisdiction-specific, and they change what a sale is worth. The tax section shows the verified holding rules per jurisdiction, and the fee comparison shows what the round trip costs on each venue. The crypto tax basics guide covers the wider framework.

Related terms

• wash sale rule — the constraint that may or may not apply
• capital gains — what a harvested loss offsets
• cost basis — what the new lot records
• tax lot — what selling and rebuying creates
• taxable event — what the sale itself is
• specific identification — how you choose which lot to sell

Questions

Does the wash sale rule apply to crypto?

Section 1091 is written in terms of stock and securities, and the Internal Revenue Service treats virtual currency as property. Whether and how that interacts is a question for a professional, and other jurisdictions handle it differently and sometimes explicitly.

Can I harvest a loss and buy back immediately?

Whether the loss survives depends on the repurchase rules where you file. The trade also costs fees and spread twice and starts a new holding period, which are real costs regardless of the tax answer.

Do losses expire?

Many systems allow unused capital losses to be carried forward, sometimes indefinitely and sometimes not. The carry-forward rules are jurisdiction-specific.