How does tax-loss harvesting work?
Mechanics plus the wash-sale rule.

What it is

Tax-loss harvesting is selling an investment at a loss so you can use that loss to reduce your tax bill. Losses offset gains of the same type first (long-term with long-term, short-term with short-term), then cross over to the other type. After that, up to $3,000 per year can offset ordinary income. Remaining losses carry forward with no expiration.

A $30,000 harvested loss in a bear marketBear marketA long slide in prices, usually defined as a drop of 20% or more from a recent high in a broad market index such as the S&P 500. Bitcoin's four completed cycle bear markets bottomed 77% to 93% below their peaks, and so far it has gone on to new highs after each one. year can shelter $30,000 of gains from your next bull marketbull marketA period when investment prices are rising or expected to rise.. If you never realize $30K of gains, it shelters $3,000/year of ordinary income for the next decade. Either way, the loss is not wasted.

The wash sale rule (for stocks)

Section 1091 of the Internal Revenue Code says: if you sell a security at a loss and buy a "substantially identical" security within 30 days before or after the sale, the loss is disallowed. Instead, it gets added to the cost basiscost basisWhat you originally paid for an asset. Used to calculate how much profit (or loss) you made when you sell.Full definition of the replacement shares.

• VOO and IVV both track the S&P 500, but the IRS sources here do not give a definitive ruling on that pair. Do not describe the swap as automatically safe or automatically a wash sale. Compare index methodology, holdings and structure with a tax professional before harvesting. ^[1]
• Your spouse's accounts count.
• Your IRAIndividual Retirement Account (IRA)A retirement account with tax advantages and eligibility rules. Traditional IRA contributions may be deductible; taxable withdrawals generally enter income. Roth contributions use after-tax money, and qualified Roth withdrawals are tax-free.Full definition purchases count. Buying the same stock in your IRA within 30 days of a taxable loss kills the loss in taxable, permanently.
• Options and warrants on the same stock count.

Before selling, review purchases in the preceding 30 days and planned purchases for the following 30 days, including automatic investments and dividend reinvestment. Choose a meaningfully different exposure only after evaluating the substantially-identical standard; alternatively wait outside the window, accepting market-exposure risk. A different issuer alone is not a safe harbor. ^[1]

Bitcoin: no wash sale rule

IRS Notice 2014-21 treats convertible virtual currency as property for federal tax purposes. Section 1091 covers stock or securities; the text checked September 17, 2026 does not expressly extend the rule to direct spot Bitcoin. Property classification alone is not a blanket exemption: securities are also property, and Bitcoin ETF shares must be evaluated under the securities rules. ^{[2] [3]}

That means: you can sell 1 BTCBitcoin (BTC)The ticker symbol for Bitcoin, used on exchanges and in price quotes.Full definition at a loss, capture the loss for tax purposes, and buy 1 BTC back ten seconds later. Your position is unchanged. Your market exposure is unchanged. Your tax position is dramatically better.

How to systematically harvest BTC losses

1. Use tax software (Koinly, CoinTracker) to identify lots showing unrealized losses. Not your whole position - just specific purchase lots below current price.
2. Use "Specific ID" or "HIFO" (Highest In First Out) accounting to sell those specific high-cost lots first.
3. Execute the sale on your exchange of choice. Realize the loss.
4. Immediately buy back the same amount of BTC. No 30-day wait.
5. Record the transactions meticulously. Your cost basis in the new lot is the new purchase price. Your unrealized gain starts from there.

Do this in every meaningful drawdown. The math compounds across cycles.

Real example

At a 24% marginal rate applied to $3K/year, that is ~$720 of direct tax savings per year, for 10 years. If used against future capital gains at 20% plus NIITNet Investment Income Tax (NIIT)A 3.8% extra federal tax on investment income for higher earners (above $200k single, $250k married).Full definition, it is closer to $7,100 in one shot.

Pending legislation

The crypto wash-sale loophole has been a target since at least 2021. The Build Back Better framework in 2021, the Biden FY budgets, and multiple standalone bills have all proposed extending wash-sale rules to digital assets. None have passed as of this writing, but the pressure is real.

Not a loophole in the pejorative sense. It is how the law reads, as written. The IRS knows. Congress knows. Use it honestly while it is legal.