What Is Tax-Loss Harvesting?
Tax-loss harvesting is selling assets sitting below your cost basis to realize the loss on purpose, because realized losses offset realized gains and up to $3,000 of ordinary income per year, with the excess carrying forward indefinitely. It converts red positions into tax value without necessarily changing what you hold, and crypto's rules currently make it unusually powerful.
How It Actually Works
- You bought at $5,000; it trades at $2,000. Sell and the $3,000 loss becomes real for tax purposes, offsetting gains elsewhere dollar for dollar.
- Crypto's edge: the securities wash sale rule, which bars deducting a loss if you rebuy within 30 days, does not currently apply to crypto as property. Sell, harvest, and repurchase promptly, keeping exposure while banking the loss. Congress proposes closing this regularly; verify the current year's law before relying on it, per my tax guide.
- Harvesting resets your basis lower, so future gains grow correspondingly: a deferral and rate play, not magic.
Risks and Common Mistakes
- Economic loss during the gap: repurchasing after the price ran is the classic own goal. Immediate rebuys avoid it, while the law allows them.
- Harvesting without records: lot identification, per cost basis, decides which losses exist at all. The wallet-by-wallet era makes sloppy books expensive.
- Wash-selling actual securities habits into crypto ETFs, which are securities and fully subject to the 30-day rule. The exemption covers the property, not everything crypto-flavored.
- Letting tax logic pick your portfolio: harvest positions you would hold or drop anyway; do not keep junk for its loss potential.
When It Matters
Any year with realized gains and any drawdown deep enough to matter, checked before December 31, not during filing season. The tax estimator sizes what an offset is worth at your bracket.
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