Harvesting tax losses can soften crypto losses

Sharp declines in cryptocurrencies have led some investors to fight to save some of their losses. A time-tested method, tax-loss-harvesting, can be effective.

“If you’m submerged in your crypto portfolio, you can realize losses to offset other capital gains and reinvest in assets that will hopefully increase in future value,” said Lou LaValle, CEO of 3iQ Digital Assets (US) in Hoboken, NJ

Harvesting tax losses is a simple strategy and fairly common practice in a world of traditional assets. Among the nuances of crypto that many customers may not be aware of is that although the tax authorities consider a security sold at a loss and repurchased within 30 days as a “laundry sale” that cannot be depreciated, this view does not apply to cryptocurrency.

“There is no 30-day window, which makes cryptocurrency tax loss harvesting a more advantageous portfolio strategy, especially in periods of increased market volatility,” said LaValle.


Bitcoin is about 65% lower than the record in November, LaValle said, adding that bitcoin has historically recovered well from even the deepest falls.

The IRS allows taxpayers to use losses on stocks and other investments, including crypto, to compensate for gains. If an investor’s loss exceeds the total gains for the year, the investor can deduct up to $ 3,000 against taxable income for that year and continue the remaining losses to offset gains in future years.

“When you calculate the gain or loss for each crypto sale, you include how much you paid for the crypto, your cost base,” said Gail Rosen, a CPA in Martinsville, NJ, who is also a crypto investor.

LaValle gave the example of a buyer who buys one bitcoin for 40,000 dollars in 2022. Later in 2022, when bitcoin reaches 20,000 dollars, the buyer sells her one bitcoin and realizes a loss of 20,000 dollars. The investor then uses this loss to compensate for other capital gains and buys back a bitcoin for $ 20,000. “[She] owns the same amount of bitcoin today as she did at the beginning of 2022, but at a new cost base and with a capital loss of $ 20,000 she can use at year-end, said LaValle.

“You can sell crypto for the loss, and then buy back immediately without having to wait 30 days like other investments. This means you can possibly offset this loss against all capital gains … which will help immediately with taxes,” says Brian Stoner, a CPA in Burbank, California.

“Many investors, including myself, are currently buying when the cryptocurrency market falls, and then we sell when the market starts to climb again to lock in these tax losses,” Rosen said. “I have a price in mind to buy and sell that at least covers the fee I pay to buy and sell, and my main goal is to lock in tax losses and replace crypto.

“I recommend my customers that they pay for an app to give them this cost information, since these apps generally match the sales with the highest cost they paid for the crypto,” she said, adding that this allowed tax method is called HIFO (highest in, first out) and is especially useful in a declining crypto market.