Yes, you can do tax loss harvesting with crypto, and for the 2025 tax year the strategy carries an advantage stock investors don’t get: the federal wash sale rule doesn’t apply to digital assets. The IRS classifies cryptocurrency as property rather than a security, so you can sell a token at a loss, buy it right back, and still claim the loss on your return. That gap in the rules may not last forever, but it is available now.
Why the Wash Sale Rule Doesn’t Reach Crypto
The wash sale rule under 26 U.S.C. § 1091 disallows a loss on a stock or security if you buy a “substantially identical” one within 30 days before or after the sale.1Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities The statute applies to “shares of stock or securities.” Cryptocurrency, classified as property under IRS Notice 2014-21, sits outside that definition.
In practical terms, you can sell Bitcoin at a loss on Monday morning and repurchase it Monday afternoon. The loss is still deductible. A stock investor who did the same thing would have the deduction disallowed and the amount added to the basis of the replacement shares.
Legislation to extend the wash sale rule to digital assets has appeared in multiple draft tax bills since 2021. Proposals surfaced again in 2024 and 2025 and remain in committee. Until a bill actually becomes law, the property classification keeps crypto outside § 1091. If you plan to keep harvesting year after year, check on the legislative status each fall before assuming the loophole will still be there.
The Economic Substance Trap
The absence of a wash sale rule doesn’t mean every crypto loss is bulletproof. Federal law codifies the economic substance doctrine, which requires that a transaction meaningfully change your economic position beyond the tax benefit and have a real purpose beyond reducing your tax bill.2Office of the Law Revision Counsel. 26 USC 7701 – Definitions
Selling a token and buying it back five seconds later solely to book a loss is exactly the kind of transaction the IRS could challenge under this doctrine. A loss that isn’t real in any economic sense can be disallowed regardless of whether § 1091 technically applies. No bright-line rule tells you how quickly is too quickly, but a sell-and-rebuy within the same minute with no change in your portfolio looks manufactured.
A more defensible approach is waiting at least a few days, or swapping into a different digital asset for a meaningful period before rotating back. If you have a genuine investment reason for the trade beyond taxes, document it. Most aggressive harvesting strategies fail here: the math on paper looks clean, but the substance doesn’t hold up.
Short-Term vs. Long-Term Losses
How long you held a token before selling determines whether the loss is short-term (one year or less) or long-term (more than one year), and that changes how valuable the loss is at tax time.
The IRS requires you to match losses against gains of the same type first. Short-term losses cancel short-term gains, long-term losses cancel long-term gains, and any leftover net loss of one type spills over to offset the other. Short-term gains are taxed at ordinary rates of 10% to 37%, while long-term gains get preferential rates of 0%, 15%, or 20% depending on taxable income.
A short-term loss is often more valuable dollar-for-dollar because it first offsets short-term gains that would otherwise be taxed at your highest marginal rate. If you’re holding a token you bought three months ago that has dropped sharply, selling it now captures that loss as short-term.
Cost Basis: Which Units Are You Selling?
Your cost basis is what you paid for the crypto, including transaction fees, commissions, and transfer costs.3Internal Revenue Service. Digital Assets Buy 2 ETH at $1,800 each with a $10 exchange fee, and your total basis is $3,610.
When you’ve bought the same token at different prices, you need a method to decide which units you’re selling. The IRS allows two approaches:
- FIFO (first in, first out) treats the oldest units as sold first. It’s the default if you don’t specifically identify units. During a long decline, FIFO can produce a smaller loss than you’d like, because your earliest purchases may have the lowest basis.
- Specific identification lets you choose exactly which units to sell, which lets you pick the highest-basis lots for the largest loss. The trade-off is documentation: you need the date and time each unit was acquired, its basis and fair market value at acquisition, the date and time of disposal, and the fair market value at disposal, plus what you received. You can identify units by their unique digital identifier or by keeping transaction records for all units of a token held in a single wallet or account.4Internal Revenue Service. Frequently Asked Questions on Virtual Currency Transactions
Per-Wallet Basis Starting in 2025
Starting January 1, 2025, final IRS regulations require cost basis tracking on a per-wallet, per-account basis rather than universally across all wallets. Revenue Procedure 2024-28 provided a safe harbor letting taxpayers make a reasonable allocation of existing basis to each wallet or account as of that date.5Internal Revenue Service. Revenue Procedure 2024-28 If you moved tokens between wallets before 2025 without tracking basis carefully, this matters. The allocation had to be completed by the deadline in the procedure; if you missed it, talk to a tax professional about your options.
Moving crypto between wallets you own is not a taxable event, and your basis carries over unchanged. The catch is record-keeping: exchanges generally can’t see what you paid on another platform, so tracing basis through every transfer falls on you.
Form 1099-DA and the Basis Reporting Gap
Starting with the 2025 tax year, crypto brokers must report gross proceeds from digital asset sales to the IRS on a new Form 1099-DA.6Internal Revenue Service. 2026 Instructions for Form 1099-DA Digital Asset Proceeds From Broker Transactions (Draft) The IRS will now see your sales whether you report them or not.
Cost basis reporting is narrower. Brokers only have to report basis for “covered securities,” meaning digital assets acquired after 2025 while the broker provided custodial services. For tokens you bought before 2026 or acquired outside a brokerage (mining, staking, peer-to-peer), the broker can mark the asset as noncovered and leave basis blank. You’re still responsible for calculating and reporting that basis on Form 8949.
The practical effect on harvesting: if you’re selling long-held tokens for a loss, the 1099-DA will show what you received but not what you paid. Your own records are the only defense if the IRS questions the loss.
Reporting the Loss on Your Return
Every crypto sale goes on Form 8949 and flows into Schedule D of your Form 1040. Each transaction gets its own row, with the token name or symbol, units sold, acquisition date, sale date, cost basis (including original transaction fees), and proceeds.7Internal Revenue Service. 2025 Instructions for Form 8949 – Sales and Other Dispositions of Capital Assets If your 1099-DA doesn’t reflect selling expenses, Column (g) lets you make adjustments. Cross-reference every entry against your exchange transaction history before the exchange’s data-retention window closes; mismatches between your return and the broker’s report are a common audit trigger.
Totals from Form 8949 feed Schedule D.8Internal Revenue Service. 2025 Instructions for Schedule D (Form 1040) Short-term transactions go on lines 1 through 3, long-term on lines 8 through 10.
If total capital losses exceed total capital gains, you can deduct up to $3,000 of the excess against ordinary income ($1,500 if married filing separately).9Office of the Law Revision Counsel. 26 USC 1211 – Limitation on Capital Losses That cap is fixed by statute and not inflation-adjusted. Losses above the annual limit carry forward indefinitely to offset gains in future years.10Internal Revenue Service. Topic No. 409, Capital Gains and Losses
Form 1040 also includes a mandatory yes-or-no question asking whether you received, sold, exchanged, or otherwise disposed of a digital asset during the tax year.11Internal Revenue Service. Determine How to Answer the Digital Asset Question If you harvested losses, the answer is yes. Answering no when you had reportable transactions is a misstatement on a signed return, and with 1099-DA data now flowing in, inconsistencies are easier for the IRS to spot.
Don’t Overlook Depreciated Staking Rewards
Tokens received through staking are taxable income in the year you gain control over them, valued at fair market value on that date. That value also becomes your cost basis. If the price drops after you receive them, you already paid tax on the higher value and now hold an asset worth less. Selling those depreciated rewards is a straightforward harvesting opportunity many investors miss. The same logic applies to tokens received through airdrops or hard forks, though the basis calculation there can vary.
Records That Survive an Audit
The IRS requires records sufficient to support every position on your return, and crypto makes that harder than it sounds.4Internal Revenue Service. Frequently Asked Questions on Virtual Currency Transactions At minimum, keep the date and time of every acquisition and disposal, fair market value at both points, basis for each unit, and amount received on sale.
Exchanges don’t store your data forever. Download complete transaction histories at least annually and keep them somewhere you control. For DeFi protocols, DEXs, and bridge transactions, you’ll need on-chain records like transaction hashes, because no broker is generating a 1099-DA for those. Crypto tax software that aggregates wallet and exchange data can help, but treat it as a starting point. Spot-check the numbers against your own records, particularly for cross-platform transfers where the software may not correctly carry over original basis.