How does tax-loss harvesting work?
Mechanics plus the wash-sale rule.
Bear markets feel bad. They are also the single best opportunity the tax code gives a regular investor. Selling your losers, capturing the loss on paper, and immediately buying back the same exposure is how wealthy clients turn drawdowns into refunds. Bitcoin, for now, is the cleanest asset in the portfolio for this.
Sell a losing position, buy something similar (not "substantially identical"), and deduct the loss against gains, saving up to 37% on the harvested amount. You can offset unlimited capital gains, plus $3,000/yr of ordinary income, with carryforward for unused losses.
- Tax-loss harvesting: sell at a loss, immediately buy a correlated-but-not-identical replacement, bank the tax deduction.
- The wash-sale rule: can't claim the loss if you rebuy the "substantially identical" security within 30 days.
- Common swap pairs: VTI ↔ ITOT, VOO ↔ IVV, VXUS ↔ IXUS. Same exposure, different issuer = not substantially identical.
- Losses offset gains dollar-for-dollar, plus $3,000/yr of ordinary income. Excess carries forward indefinitely.
- For crypto: no wash-sale rule (as of 2026). You can sell and immediately rebuy the same asset.
Sell positions showing a loss. That realized loss offsets capital gains dollar for dollar, plus up to $3,000 of ordinary income per year. Anything left over carries forward indefinitely. For stocks, you cannot rebuy a "substantially identical" security within 30 days (wash sale rule). For Bitcoin, that rule does not apply - you can sell and rebuy in the same minute. Congress keeps threatening to close this. Use it while you can.
Not a CPA. The current absence of the wash-sale rule for crypto is based on IRS property classification and has been a legislative target for years. Confirm current status before relying on it.
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 market year can shelter $30,000 of gains from your next bull market. 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 basis of the replacement shares.
- VOO and IVV (both track the S&P 500) are considered substantially identical. Selling one at a loss and buying the other within 30 days triggers the wash.
- Your spouse's accounts count.
- Your IRA 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.
The usual workaround for stocks: sell VOO, buy a different-but-similar fund (IVV is too similar - but an S&P 500 fund from a different provider with different methodology may or may not be safe - tread carefully). Wait 31 days, switch back if you want.
Bitcoin: no wash sale rule
The IRS treats Bitcoin as property, not a security (IRS Notice 2014-21). The wash-sale rule in Section 1091 is written specifically for securities. It does not apply to property.
That means: you can sell 1 BTC 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.
This is not a loophole, a trick, or a grey area. It is how the law is currently written. Every CPA who works with crypto clients uses it. What makes it special is that it applies cleanly to the single most volatile legal asset most investors own - guaranteeing multiple harvest opportunities per decade.
How to systematically harvest BTC losses
- Use tax software (Koinly, CoinTracker) to identify lots showing unrealized losses. Not your whole position - just specific purchase lots below current price.
- Use "Specific ID" or "HIFO" (Highest In First Out) accounting to sell those specific high-cost lots first.
- Execute the sale on your exchange of choice. Realize the loss.
- Immediately buy back the same amount of BTC. No 30-day wait.
- 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
- January: you DCA-buy 1 BTC at $100,000. Cost basis: $100K.
- October: BTC drops to $72,000. Your 1 BTC is now worth $70K. Unrealized loss: $30,000.
- You sell the lot. Realize a $30,000 capital loss.
- Same minute, you buy back 1 BTC at $72,000. New cost basis: $70K.
- Your BTC position: unchanged. Your market exposure: unchanged.
- Your tax return: $30K of capital losses. Offsets $30K of future capital gains, or $3K/year of ordinary income for 10 years.
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 NIIT, 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.
Planning note: treat this like an expiring tax benefit. Harvest aggressively while it exists. If legislation passes, it will almost certainly be prospective - but do not bet the strategy on that.
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.
Reminder: not tax advice. For anything material, hire a CPA who works with crypto clients.
- IRS Notice 2014-21 (virtual currency as property) - irs.gov
- IRC Section 1091 (Wash Sale rule) - cornell.edu
- IRS Publication 550 (Investment Income and Expenses) - irs.gov
- Build Back Better and follow-on proposals to extend wash-sale to digital assets - Congress.gov
- Koinly guide to tax-loss harvesting - koinly.io
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Last updated 2026-04-14. Not legal or tax advice. For anything material, hire a CPA.
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