Unlike stocks, crypto isn't subject to the wash sale rule — yet. This means you can sell at a loss, immediately buy back, and still claim the deduction. It's one of the most powerful tax strategies available to crypto investors in 2025.
But the window is closing. Here's how to maximize it while you still can.
What Is Tax-Loss Harvesting?
Tax-loss harvesting means selling investments at a loss to offset capital gains and reduce your tax bill.
You Have | You Can Offset |
|---|---|
$10,000 crypto gains | $10,000 crypto losses = $0 taxable |
$5,000 gains, $8,000 losses | $0 gains + $3,000 deducted from income |
No gains, $15,000 losses | $3,000/year deducted, $12,000 carried forward |
Key rules:
Losses first offset gains of the same type (short-term offsets short-term)
Excess losses offset the other type
After that, deduct up to $3,000 from ordinary income
Remaining losses carry forward indefinitely
The Crypto Advantage: No Wash Sale Rule
For Stocks (Wash Sale Rule Applies)
You sell Stock ABC at a $5,000 loss. If you buy it back within 30 days (before or after), the loss is disallowed.
For Crypto (No Wash Sale Rule — Yet)
You sell BTC at a $5,000 loss. You buy it back immediately. The loss is fully deductible.
Asset Type | Wash Sale Rule? | Can Rebuy Immediately? |
|---|---|---|
Stocks | Yes | No — wait 30 days |
Mutual funds | Yes | No — wait 30 days |
ETFs (including crypto ETFs) | Yes | No — wait 30 days |
Direct crypto | No | Yes |
Why? The IRS classifies crypto as "property," not a security. IRC Section 1091 (wash sale rule) only applies to stocks and securities.
Warning: This Loophole Is Closing
Signs the Rule Is Coming
Year | Development |
|---|---|
2021 | Build Back Better Act proposed extending wash sale to crypto (stalled) |
2022 | Inflation Reduction Act dropped the provision |
2024-2025 | Treasury Greenbooks continue proposing the change |
2025 | Form 1099-DA includes Box 1i: "Wash sale loss disallowed" — infrastructure ready |
The IRS has already built the reporting framework. They're just waiting for Congress to flip the switch.
The Economic Substance Doctrine
Even without a formal wash sale rule, the IRS may challenge losses that lack "economic substance."
Risky: Sell and rebuy within seconds for the sole purpose of creating a paper loss.
Safer: Wait a few days between sell and rebuy. Market volatility provides legitimate economic substance — prices can move significantly in 48-72 hours.
Year-End Tax-Loss Harvesting Strategy
Step 1: Identify Underwater Positions
Review your portfolio for assets trading below your cost basis.
Asset | Purchase Price | Current Price | Unrealized Loss |
|---|---|---|---|
ETH | $3,500 | $2,800 | $700 |
SOL | $150 | $90 | $60 |
LINK | $25 | $18 | $7 |
Step 2: Prioritize Short-Term Losses
Why? Short-term losses offset short-term gains first — and short-term gains are taxed at ordinary income rates (up to 37%).
Gain Type | Tax Rate | Loss Priority |
|---|---|---|
Short-term (<1 year) | 10-37% | Harvest these first |
Long-term (>1 year) | 0-20% | Harvest second |
A $1,000 short-term loss saves more tax than a $1,000 long-term loss.
Step 3: Calculate Net Position
Category | Amount |
|---|---|
Total capital gains (2025) | +$25,000 |
Harvestable losses | -$18,000 |
Net taxable gain | $7,000 |
Step 4: Execute Before December 31
Critical deadline: Losses must be realized (sold) by December 31 to count for the 2025 tax year.
Don't wait until December 30 — exchange delays, network congestion, or settlement issues could push your transaction into 2026.
Advanced Strategies
Use HIFO (Highest In, First Out)
When selling partial positions, choose the specific tax lots with the highest cost basis.
Purchase Date | Amount | Cost Basis | Current Value |
|---|---|---|---|
Jan 2024 | 1 ETH | $2,200 | $2,800 |
Mar 2024 | 1 ETH | $3,800 | $2,800 |
Jun 2024 | 1 ETH | $3,200 | $2,800 |
FIFO (default): Sell the Jan 2024 ETH → $600 gain HIFO: Sell the Mar 2024 ETH → $1,000 loss
Same sale, opposite tax outcome.
IRS Notice 2025-7: Through 2025, you can use HIFO without notifying your exchange in advance — but maintain detailed records.
Wallet-by-Wallet Consideration
Starting January 1, 2025, the IRS requires per-wallet accounting. You can't pool cost basis across exchanges.
Exchange | Asset | Cost Basis |
|---|---|---|
Coinbase | 1 BTC | $45,000 |
Kraken | 1 BTC | $62,000 |
If you sell on Kraken, your cost basis is $62,000 — not the Coinbase price.
Strategy: Harvest losses on the exchange where your cost basis is highest relative to current price.
Harvest During Dips (Not Just Year-End)
Don't wait for December. Major market dips throughout the year are harvesting opportunities.
Timing | Advantage |
|---|---|
Market crash | Maximum loss realization |
Year-end | Last chance for current tax year |
After selling winners | Offset gains immediately |
The Rebuy Decision
Option 1: Immediate Rebuy
Pros:
Maintain full market exposure
Capture any recovery
No wash sale rule (for now)
Cons:
Resets holding period (new purchase = short-term)
Economic substance concerns if done instantly
Lower cost basis = higher future gains
Option 2: Wait and Rebuy
Pros:
Bulletproof against future rule changes
Demonstrates economic substance
May catch a lower price
Cons:
Risk missing price recovery
30 days is a long time in crypto
Option 3: Buy Similar (Not Identical) Asset
Example: Sell ETH at a loss, buy SOL or another L1.
Pros:
Maintains crypto market exposure
Clear economic substance
Sidesteps any future wash sale interpretation
Cons:
Different asset = different risk profile
May not track your original position
What Tax-Loss Harvesting Can't Do
Limitation | Details |
|---|---|
Create losses from nothing | You need actual unrealized losses |
Offset more than $3,000 ordinary income/year | Excess carries forward |
Eliminate taxes permanently | Rebuying at lower price increases future gains |
Apply to gains in retirement accounts | IRAs/401(k)s don't have capital gains |
The Cost Basis Trade-Off
Scenario | Original Basis | Loss Harvested | New Basis | Future Gain |
|---|---|---|---|---|
Buy BTC at $60K | $60,000 | — | — | — |
Price drops to $40K | — | — | — | — |
Sell and rebuy | — | $20,000 loss | $40,000 | +$20K if price recovers |
You're not eliminating taxes — you're deferring them. But time value of money makes this worthwhile, especially if you expect to be in a lower tax bracket later.
Reporting Tax-Loss Harvesting
Forms Required
Form | Purpose |
|---|---|
Form 8949 | Report each sale (date, proceeds, cost basis, gain/loss) |
Schedule D | Summary of capital gains and losses |
Form 1040 | Net capital loss deduction (up to $3,000) |
What to Track
For every harvesting transaction:
[ ] Date of original purchase
[ ] Original cost basis (including fees)
[ ] Date of sale
[ ] Sale proceeds
[ ] Loss amount
[ ] Date of rebuy (if applicable)
[ ] New cost basis
Common Mistakes
Mistake | Why It's a Problem |
|---|---|
Waiting until December 31 | Settlement delays could push to next year |
Harvesting in wrong account | No benefit in IRAs/401(k)s |
Not tracking rebuy basis | IRS defaults to FIFO — may not be optimal |
Selling winners and losers together | Net them separately for maximum benefit |
Ignoring transaction fees | Fees add to cost basis — include them |
Assuming crypto ETFs have same rules | ETFs ARE subject to wash sale rule |
2025 Checklist: Before Year-End
[ ] Review all crypto positions for unrealized losses
[ ] Identify highest-basis lots (use HIFO)
[ ] Calculate total gains to offset
[ ] Prioritize short-term losses
[ ] Execute sales by December 31
[ ] Decide: rebuy immediately, wait, or buy similar asset
[ ] Document everything (dates, prices, transaction IDs)
[ ] Keep records for at least 6 years
The Bottom Line
Key Point | Details |
|---|---|
Wash sale rule applies to crypto? | No — not yet |
Can you rebuy immediately? | Yes (but wait a few days to be safe) |
Deadline for 2025 losses | December 31, 2025 |
Max ordinary income offset | $3,000/year |
Best cost basis method | HIFO (highest in, first out) |
Will this loophole close? | Likely yes — infrastructure already built |
Tax-loss harvesting is legal, powerful, and still available for crypto investors. The IRS has signaled it wants to close this gap — Form 1099-DA already has a box for disallowed wash sale losses.
Use this strategy while you can. Document everything. And don't wait until the last minute.
Disclaimer: This article is for informational purposes only and does not constitute tax, legal, or financial advice. Consult a qualified tax professional for advice specific to your situation.
By Ran Chen, EA, CFP®