Disclaimer: USA ONLY, DYOR

Intro

I am a crypto-focused CPA (USA) and am currently reviewing tax loss harvesting opportunities for my clients as we approach year-end. MANY of my clients have unrealized losses they are sitting on across various tokens, and many of them are completely unaware to the tax benefits of selling the losers.

The Basics

It is important to first understand some basic definitions:

• "Tax Loss Harvesting" is the act of intentionally selling underperforming assets at a loss in order to reduce capital gains from other investments. This strategy is widely used by savvy investors to strategically reduce tax burdens year over year.
• "Wash Sales" occur when a taxpayer sells stock or securities at a loss and, within 30 days before or after the sale, the taxpayer buys or acquires substantially identical stock or securities.

Due to the wash sale rule, the act of selling a stock to capture the tax loss and then rebuying it shortly after has been disallowed, making tax loss harvesting a tricky endeavor for those harvesting losses in stock but wishing to remain exposed to the position.

However, with crypto specifically, there is a HUGE loophole that is still open as of 2024, but could be closing in 2025. This very well could be the last year to take advantage of this loophole.

Wash Sale Loophole

Similar to stock, many crypto investors likely have bags that are in the red. These assets with unrealized losses can be sold to realize the loss, which will reduce capital gains from other crypto, stock, real estate, etc and reduce overall tax burden.

So, what's the loophole?

As mentioned above, selling stock and securities at a loss and then rebuying the asset within 30 days is disallowed due to the wash loss rule, making tax loss harvesting tricky. However, the definition of the Wash Sale rule explicitly states it's applicable to stock and securities. Crypto, is NOT a stock or security, but is rather viewed as property in the eyes of the IRS. As such, many tax lawyers have concluded that a taxpayer can easily defend the position that the wash loss rule does not apply to crypto. I am a CPA, not a lawyer, so don't take my word for it, check out tax lawyer Gordonlaw discussing it here. Joe Biden, when he was still running for president, had proposed to close the loophole in his 2025 tax bill, confirming that even the federal government acknowledge the IRS is unable to enforce the wash loss rule on crypto based on current wording of the law.

What's the Benefit?

Capital losses can be used to offset capital gains from all sources (crypto, stock, real estate, etc.). For any remaining capital losses in excess of capital gains, up the $3k can be used to offset ordinary income. Any remaining amount after that will be carried forward to next year where the process repeats and will be used to offset capital gains and then up to $3k of ordinary income. Capital losses can be carried forward indefinitely.

By applying this strategy, taxpayers can reduce taxable gains and reduce their tax burden by strategically harvesting losses. With crypto, if they still wish to remain exposed to the position, they can simply rebuy the asset without worry of the wash sale rule, effectively harvesting the loss and adjusting down the cost basis.

What's the Risk?

If you sell an underperforming token and then rebuy it, you will harvest the loss in this tax year and adjust down the cost basis. By doing so, you will also reset the holding period clock for long term gains. So if the asset goes up in value, and is sold within 12 months, the gains would be short term.

Conclusion

As we approach year-end, tax loss harvesting should be top of mind for crypto investors looking to offset capital gains or even just bank losses for future gains. Since the wash loss rule does not apply to crypto, there is a very advantageous loophole available to crypto investors allowing them to bank the loss and then rebuy the asset within 30 days to gain the benefit of the tax loss while still remaining exposed to the asset. Talk with your accountant and see if this strategy is right for you.