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Key Takeaways

  • Crypto tax-loss harvesting allows you to sell your crypto at a loss to offset your capital gains and lower your tax bill;
  • You can make use of the Wash Sale loophole and repurchase your crypto within 30 days of selling it so your portfolio remains unaffected;
  • If your capital losses exceed your capital gains, you can roll them over into the next year or use them to deduct up to $3000 from your ordinary income.
A Beginner’s Guide to Crypto Tax-Loss Harvesting

The saying “no pain, no gain” is a familiar platitude among investors – capital losses are such a fact of life that, instead of mourning them, you might as well find a way to leverage them to your advantage. That’s exactly what crypto tax-loss harvesting is all about: taking the sting out of unsuccessful investment decisions by recouping your money through a tax deduction. And when it comes to crypto, tax-loss harvesting could turn out to be an even more valuable tool!

After two years of relative chaos and uncertainty, the cryptocurrency market seems to have finally found its way back to the bull track. Nevertheless, a wise crypto investor should always look out for a storm and be ready to act.

If you’re eager to learn how to turn your proverbial lemons into lemonade by harvesting your tax losses with crypto, look no further! With the help of this article, as long as you own some crypto coins, you can strategically sell and buy them to lower your tax bill. If you haven’t gotten your hands on some coins yet, you can always buy them on major crypto exchanges such as Binance, Bybit, or Kraken.

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What Is Crypto Tax-Loss Harvesting?

If you’ve never heard the words “crypto tax-loss harvesting” before, brace yourself – you’re in for a ride!

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In traditional finance, tax-loss harvesting is a strategy used by investors to avoid paying higher taxes. When it comes to any kind of investment, you only have to pay taxes for realized capital gains – the profit you made by selling an asset for a higher price than you bought it.

However, the higher your capital gains, the higher taxes you have to pay for them. That’s where tax-loss harvesting comes into action: by deliberately selling an asset during the dip when its price is lower than what you originally paid for it, the resulting capital loss cancels out the capital gains you’ve made, and the difference gets deducted from your taxes.

The good news is that if you’ve got a grasp on tax-loss harvesting in general terms, you already know what crypto tax-loss harvesting is! Still, let me illustrate with a case in point.

Example

Let’s say Christina bought 1 BTC for $42,000 and 1 ETH for $1000. Later, the price of BTC fell to $18,000 while the price of ETH went up to $3000. Christina wants to realize her gains on ETH so she sells it at $3000.

This means she now has $2000 in capital gains from that 1 ETH she’s sold. Without tax-loss harvesting, she would now owe taxes on those $2000.

Crypto tax-loss harvesting: a magnifying glass showing Bitcoin.

Sounds like a raw deal? Christina thinks so, too – that’s why she decides to tax-loss harvest her crypto to lower her bills. She sells her 1 BTC for the current market price of $18,000, incurring a capital loss of $24,000.

She can now offset this capital loss against the capital gain from ETH (with a lot left to spare – more on this later). As a result, her capital gains get wiped out, meaning she won’t have to pay taxes on them.

If this seems a bit too good to be true, rest assured – crypto tax-loss harvesting is perfectly legal! As per the IRS (Internal Revenue Service) and corresponding authorities in most other countries, it’s a legitimate tax avoidance strategy and doesn’t fall under tax evasion. It’s been widely employed by a lot of investors in traditional finance too, not just with cryptocurrency.

As long as you file your taxes correctly, you have nothing to worry about. Not only is tax-loss harvesting with crypto allowed, but it even has an edge over harvesting losses with other assets due to a certain legislative loophole.

The Wash Sale Loophole

Since investors are known to be an enterprising bunch, regulatory authorities have to stay on their toes and keep plugging various legislative gaps to prevent overeager investors from exploiting the market, inadvertently or not. One such gap is particularly relevant to crypto tax-loss harvesting: the Wash Sale loophole.

The Wash Sale rule is a legislation meant to obstruct an obvious scheme investors could be tempted to carry out: if all you need to neutralize your capital gain taxes is to sell an asset at a loss before the end of the tax year, what’s stopping you from simply buying that asset again immediately afterwards so that your portfolio remains unchanged?

To that end, the IRS has implemented the Wash Sale rule that prevents taxpayers from deducting losses on securities sold at a loss and bought back within 30 days before or after the sale.

Crypto tax-loss harvesting: a person counting coins.

This law isn’t unique to the USA: the equivalent authority in the United Kingdom, HMRC, enforces the same rule. Over there, it goes under the name of “Bread and Breakfast rule”.

So, what’s that loophole again, you might ask?

Basically, due to cryptocurrency still being somewhat of a grey area in the US law, it’s not subject to the Wash Sale rule, at least for now. There’s a brewing debate over the legal status of crypto.[1] The U.S. Securities and Exchange Commission classifies all cryptocurrencies as securities, except for Bitcoin. The IRS, on the other hand, maintains that crypto is property.

For all intents and purposes, this means you’re free to sell your crypto at a loss and buy it back within the 30-day before-or-after window. That way, you can still retain your crypto while lowering its cost basis, and the following year’s capital gains will now be counted from this new starting point.

Who Can Benefit From Tax-Loss Harvesting?

While I’ve hopefully managed to paint an enticing picture of crypto tax-loss harvesting so far, don’t get too excited yet – none of this could be relevant for you if you’re not the right audience for tax-loss harvesting in general.

If you live in the US, it’s possible that you’re already exempt from paying taxes on long-term capital gains. This exemption applies to the following annual income brackets:

  • up to $44,625 (single/married and filing separately)
  • up to $89,250 (married and filing jointly)
  • up to $59,750 (head of household)

If you fall under any of these groups, the truth is that you don’t really have much to gain from crypto tax-loss harvesting, at least in practice.

If, on the other hand, your annual income exceeds those thresholds – or perhaps if you’re still interested in learning more about crypto tax-loss harvesting purely for the sake of curiosity – carry on!

Let’s take a closer look.

How Does Crypto Tax-Loss Harvesting Work?

While the basics of crypto tax-loss harvesting might not be rocket science, there are still quite a few intricacies to comb through. What’s more, missing even one piece of the puzzle can make the whole operation fall through. With stuff like taxes, the stakes are simply too high to be half-hearted about it. So read these following sections carefully!

Timing

One crucial component of a successful crypto tax-loss harvesting strategy is planning ahead. You have to realize your losses by the end of the tax year (before December 31st in the US and April 15th in the UK). Any losses you realize after those dates will count towards the next year.

Make sure to start early, too – don’t leave it until the last minute!

Crypto tax-loss harvesting: two Bitcoins and a stash of dollar bills.

That said, while it’s imperative to keep track of this final deadline, the end of the tax year isn’t the only time you can harvest your losses. Crypto investors often strategically dabble in tax-loss harvesting throughout the year to take advantage of market dips, especially during the bear market.

Cost Basis Methods

Another crucial factor that could make or break your crypto tax-loss harvesting efforts is picking the right cost basis method when calculating your crypto gains and losses.

In crypto, the cost basis is the sum of the original price you paid for a coin or token and their transaction fees.

Crypto tax-loss harvesting: a pile of Bitcoins.

The cost basis method (sometimes called the accounting method) lets you determine the order in which to sell your crypto coins if you’ve bought them several times at different price points.

The three most popular cost basis methods in the US are:

  • FIFO (First In First Out): The first crypto batch you’ve bought is the first one you sell.
  • LIFO (Last In First Out): The reverse of FIFO.
  • HIFO (Highest In First Out): The coins with the highest cost basis (at the point of purchase) are the ones you sell first.

In the US, FIFO is often the default choice for crypto tax-loss harvesting, especially when the goal is to play the long game and exploit the market dip – in this case, the coins you bought first will be the ones you paid the most for.

Meanwhile, some countries like Australia and the UK use the cost of purchase as the default cost basis method.

Speaking of the long game – gains from crypto coins sold after holding them for a year or more are taxed at a lower rate, which is another good reason to stick to the FIFO method as a safe default choice.

Limitations

If you’ve suffered a losing streak, you’ll be glad to hear that none of it needs to go completely to waste – in the US, there’s no cap on how much of your losses you’re allowed to harvest, crypto or otherwise.

Even if your realized capital losses completely cover your gains or exceed them, the surplus gets rolled over into the next year. There’s no expiration date to speak of.

For those in the US, there’s one more potential benefit to capitalize on: you can use surplus losses to deduct up to $3,000 of your regular annual income!

Crypto tax-loss harvesting: a vertical pile of wooden blocks forming the word.

If you’re married but filing separately, the income deduction ceiling is $1,500.

Aside from these considerations, you should also bear in mind that, as I said, long-term and short-term gains are held to a different standard and taxed accordingly. Crypto holdings that are sold within 12 months of purchase have a tax rate up to 17% lower than those you’ve held on to for more than 12 months.

The IRS recommends that you offset gains and losses of the same type against each other – meaning that if you’ve incurred short-term losses, you should first use them to offset short-term gains and vice versa.

Can You Tax-Loss Harvest NFTs?

What about cryptocurrency’s non-fungible sibling, then? Do the crypto tax-loss harvesting rules apply to NFTs, as well?

Thanks to their languishing status in the current crypto market landscape, many NFT owners are now wondering if they should pull the plug. If you’re one of them – you can do precisely that if you’re so inclined! NFTs are legally recognized as a type of crypto asset, so they’re subject to the same taxation laws.

Crypto tax-loss harvesting: three dice with the letters NFT.

However, NFTs’ unique properties and uncertain place in the ecosystem might add some additional hoops to jump through, such as the difficulty of estimating their value or finding potential buyers.

Is Tax-Loss Harvesting With Crypto Worth It?

You’ve seen the big picture – now it’s time to whip out the measuring scales. Is there a catch to crypto tax-loss harvesting? How do the pros and cons add up?

Benefits

The number one incentive to tax-loss harvest your crypto is, of course, lower taxes. As I’ve outlined above, leveraging your losses that way can offset not only your capital gains taxes but a portion of your annual income tax as well.

From this angle, it seems like there’s no good reason to sit on your losses and wait for the tide to turn, only to end up having to pay higher taxes on your gains. This is especially relevant for those in the higher income brackets since they’re liable to pay higher taxes as well.

Crypto tax-loss harvesting: a piggy bank with Bitcoins scattered around it.

Even if your income level exempts you from capital gains taxes, partaking in tax-loss harvesting every now and again can be an excellent way to keep your financial faculties from getting rusty. Being an investment whiz is like playing chess – even if you’re not making a move at the moment, you should always be calculating your next one!

Let’s be clear, however – there are always some perils lurking around the corner, too.

Risks

One of the most pressing worries, at least in the US, is the looming closure of the Wash Sale loophole. Let’s face it – being the new player in the finance sector has allowed cryptocurrency to fall through the cracks where certain regulations are concerned, much to the gratitude of investors eager to probe this untapped frontier.

But this won’t last forever. In the US, the Biden administration has already set their eyes on closing the loophole, which would make crypto tax-loss harvesting wash sales illegal, just like with other assets.

Crypto tax-loss harvesting: a Bitcoin on top of falling dominoes.

It’s not just the regulatory bodies that might put a spoke in your wheel, though – you’re more likely to accidentally do that yourself! If you give in to the temptation of a crypto tax-loss harvesting wash sale and buy your coins back, the reduced cost basis could weigh you down with even higher capital gains taxes in the long run.

Lastly, don’t forget to factor in the general high volatility of the crypto market[2]  – it can definitely make it more challenging to determine the optimal time to dispose of your crypto holdings.

How to Get Started With Crypto Tax-Loss Harvesting?

With this precautionary advice out of the way – if you still want to try your hand at tax-loss harvesting with crypto, I have a few tips.

Here’s a simple checklist you can follow:

Step 1: Review the current crypto market situation and identify coins whose value has dropped since you last bought them.

Step 2: Take a look at the crypto market predictions for the near future – is the situation expected to change drastically?

Step 3: Analyze the history of your crypto portfolio – does it contain the coins in question?

Step 4: Calculate the capital losses you could claim if you sold those coins at their current market price.

Crypto tax-loss harvesting: vertically arranged wooden blocks forming the word "taxes".

Step 5: Check if those capital losses would be enough to offset your capital gains and/or some of your annual income.

Step 6: Decide which cost basis method you’d like to use.

Step 7: Sell your coins on an exchange platform like Binance or Kraken.

Step 8: File your taxes at the end of the year and claim your capital losses.

As you can see, the logistics themselves are much less complicated than the strategic thinking homework you’ll have to do beforehand! Take your time and examine your options from every angle.

Crypto Tax-Loss Harvesting Software

These days, if it feels like there should be an app for it – there probably is! Crypto tax-loss harvesting is no exception. There’s no longer any need to manually pore over the history of your crypto transactions while trying to crunch the numbers in your head.

In 2024, you’re spoilt for choice regarding tax-loss harvesting software. Let’s check out some of the top contenders.

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TokenTax

Crypto tax-loss harvesting: a screenshot of Tokentax homepage.

Founded in 2017, this app is a full-fledged crypto tax calculator with a host of general accounting functionalities as well. It's supported in the US, the UK and Canada.

TokenTax boasts an intuitive interface and features like automatic API imports, CVS uploads, and NFT support. You can easily generate different types of tax reports and choose between FIFO, HIFO, or LIFO cost basis methods.

The pricing has several tiers, starting from $65/year. Sadly, this app has no free trial option.

Recap

Crypto tax-loss harvesting: a screenshot of Recap homepage.

Recap is a privacy-focused crypto tax app aimed at UK investors. It allows you to track your whole portfolio and accounts in one place. You can see your transaction history, analyze your performance, optimize future investments, and generate automatic reports in line with HMRC guidelines.

Recap has integrations with major crypto exchanges like Binance and Kraken. It comes with a free plan that covers all the basic needs of amateur investors, including unlimited integrations, mining and staking, and portfolio tracking. More prolific traders can opt for the Basic ($99/year) plan that includes up to 5,000 transactions or the Pro ($179/year) plan with no transaction limit.

Recap is available for MacOS, Windows and Linux.

CoinTracker

Crypto tax-loss harvesting: a screenshot of CoinTracker homepage.

CoinTracker is another popular crypto-tracking tool with a user-friendly interface. It supports over 300 exchanges (including the most popular ones like Binance and Bybit) and a whopping 8,000 cryptocurrencies, as well as TurboTax and TaxAct platforms for e-filing in the US. It features automated DeFi detection and syncs all your crypto activity across different platforms.

The free version only includes tax summary and portfolio value, while Base ($59/year), Prime ($199/year), and Ultra ($599/year) plans come with extra capabilities like tax-loss harvesting and tax lots breakdown.

Blockpit

Crypto tax-loss harvesting: a screenshot of Blockpit homepage.

Blockpit is an Austria- and Germany-based company specializing in crypto-tracking solutions for private investors. Part of the “Big Four Accounting Firms”, Blockpit has been shaping European tax policies for over six years. It’s currently supported in the USA, Germany, the UK, Austria, France, Spain, Netherlands, Switzerland, Belgium, and Italy (coming soon).

Blockpit offers over 250,000 integrations – no matter how obscure your blockchain, exchange platform or wallet of choice is, chances are it’s available! The app also comes with a plethora of advanced DeFi, staking, and mining taxation features. You can monitor your portfolio on the dashboard and get real-time insights, generate country-specific tax reports, and even get pre-filled tax forms.

Blockpit has four different annual plans based on the number of transactions per tax year: Lite ($49; up to 50 transactions), Basic ($109; up to 1,000 transactions), Pro ($269; up to 25,000 transactions), and Unlimited ($639; up to 500,000 transactions).

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ZenLedger

Crypto tax-loss harvesting: a screenshot of ZenLedger homepage.

This app is tailored towards the US tax system but has an option for providing generic reports for a number of other countries, too. It lets you calculate your taxes using FIFO, LIFO or HIFO cost basis method. It’s an extensive crypto tax calculator that gives you a bird’s eye view of all your transaction history and capital gains or losses so you can make informed decisions.

ZenLedger comes in three price tier plans – Silver ($49/year; up to 100 transactions), Gold ($199/year; up to 5,000 transactions) and Platinum ($399/year; up to 15,000 transactions), all of which include the tax-loss harvesting tool.

Conclusions

As you can see, crypto tax-loss harvesting is not some nefarious trickery – quite the contrary, it can serve as a life-changing tool in your investment strategy box if you master it!

Let’s have a little recap: crypto tax-loss harvesting involves selling your crypto for a lower price than you originally bought it, thus incurring a capital loss you can use to offset your capital gains and reduce your taxes. The surplus deduction can be rolled over to the next tax year or used to offset up to $3000 of your annual income.

Let me hammer in one crucial point again: as of now, crypto tax-loss harvesting is still excluded from the Wash Sale rule in the US (or the corresponding Bed and Breakfast rule in the UK), meaning you can simply buy the same or “substantially identical” crypto asset again if you didn’t actually want to get rid of it, only to lower your cost basis.

If you’re confident that crypto tax-loss harvesting is right for you, feel free to pop over to your exchange platform (if you haven’t signed up to one yet, I recommend Binance, Bybit or Kraken), weigh your transactions, and consider using crypto tax-loss harvesting software to save yourself some time.

The content published on this website is not aimed to give any kind of financial, investment, trading, or any other form of advice. BitDegree.org does not endorse or suggest you to buy, sell or hold any kind of cryptocurrency. Before making financial investment decisions, do consult your financial advisor.


Scientific References

1. L. W. Cong, W. Landsman, E. Maydew, et al.: ‘Tax-Loss Harvesting with Cryptocurrencies’;

2. H. Gupta, R. Chaudhary: ‘An Empirical Study of Volatility in Cryptocurrency Market’.

About Article's Experts & Analysts

By Aaron S.

Editor-In-Chief

Having completed a Master’s degree in Economics, Politics, and Cultures of the East Asia region, Aaron has written scientific papers analyzing the differences between Western and Collective forms of capitalism in the post-World War II era. W...
Aaron S. Editor-In-Chief
Having completed a Master’s degree in Economics, Politics, and Cultures of the East Asia region, Aaron has written scientific papers analyzing the differences between Western and Collective forms of capitalism in the post-World War II era.
With close to a decade of experience in the FinTech industry, Aaron understands all of the biggest issues and struggles that crypto enthusiasts face. He’s a passionate analyst who is concerned with data-driven and fact-based content, as well as that which speaks to both Web3 natives and industry newcomers.
Aaron is the go-to person for everything and anything related to digital currencies. With a huge passion for blockchain & Web3 education, Aaron strives to transform the space as we know it, and make it more approachable to complete beginners.
Aaron has been quoted by multiple established outlets, and is a published author himself. Even during his free time, he enjoys researching the market trends, and looking for the next supernova.

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FAQ

Is crypto tax-loss harvesting still legal?

Crypto tax-loss harvesting doesn’t count as tax evasion. What’s more, unlike traditional securities such as stock and bonds, it’s not subjected to the Wash Sale rule, meaning that you’re allowed to buy the same or substantially identical crypto again within 30 days of selling it at a loss. Some regulators are clamoring to close this loophole, though. By the way, you can buy and sell your crypto holdings on exchange platforms like Binance, Bybit and Kraken.

Can you carry over your realized capital losses from crypto?

If your capital losses exceed your capital gains and your regular income deduction allowance for that year, they don’t expire but simply get rolled over to the next year, or indefinitely. That way, crypto tax-loss harvesting can help you offset your capital gains for many years to come. You can plan ahead by regularly checking your transaction history on your crypto exchange (platforms like Binance or Kraken have a comprehensive dashboard, the former even has a tax calculation tool), keeping on top of the market status and calculating how much of your losses it’s worth to realize this year.

How to pick the best crypto exchange for yourself?

Picking out the best crypto exchange for yourself, you should always focus on maintaining a balance between the essential features that all top crypto exchanges should have, and those that are important to you, personally. For example, all of the best exchanges should possess top-tier security features, but if you're looking to trade only the main cryptocurrencies, you probably don't really care too much about the variety of coins available on the exchange. It's all a case-by-case scenario!

Which cryptocurrency exchange is best for beginners?

Reading through various best crypto exchange reviews online, you're bound to notice that one of the things that most of these exchanges have in common is that they are very simple to use. While some are more straightforward and beginner-friendly than others, you shouldn't encounter any difficulties with either of the top-rated exchanges. That said, many users believe that KuCoin is one of the simpler exchanges on the current market.

What is the difference between a crypto exchange and a brokerage?

In layman's terms, a cryptocurrency exchange is a place where you meet and exchange cryptocurrencies with another person. The exchange platform (i.e. Binance) acts as a middleman - it connects you (your offer or request) with that other person (the seller or the buyer). With a brokerage, however, there is no “other person” - you come and exchange your crypto coins or fiat money with the platform in question, without the interference of any third party. When considering cryptocurrency exchange rankings, though, both of these types of businesses (exchanges and brokerages) are usually just thrown under the umbrella term - exchange. This is done for the sake of simplicity.

Are all the top cryptocurrency exchanges based in the United States?

No, definitely not! While some of the top cryptocurrency exchanges are, indeed, based in the United States (i.e. KuCoin or Kraken), there are other very well-known industry leaders that are located all over the world. For example, Binance is based in Tokyo, Japan, while Bittrex is located in Liechtenstein. While there are many reasons for why an exchange would prefer to be based in one location over another, most of them boil down to business intricacies, and usually have no effect on the user of the platform.

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