The Crypto Tax Basics (Two Minutes)
Before we get tactical, a fast refresher on how the IRS treats crypto in the US:
- Crypto is property, not currency. Every sale, swap, or conversion is a taxable event. Trading BTC for ETH? Taxable. Using USDC to buy SOL? Taxable.
- Short-term vs. long-term. Held less than a year? Gains are taxed at your ordinary income rate (up to 37%). Held more than a year? Long-term capital gains rates apply (0%, 15%, or 20% depending on income).
- Losses offset gains. Realized losses can offset realized gains dollar-for-dollar. If losses exceed gains, you can deduct up to $3,000 against ordinary income per year, with the remainder carrying forward indefinitely.
- Cost basis method matters. FIFO, LIFO, HIFO, and Specific Identification can produce radically different tax bills on the same sale. HIFO (highest in, first out) typically minimizes short-term gains.
- Unrealized = not taxed. Holding through a drawdown doesn't create a loss you can claim. You have to actually sell to realize it.
What Tax-Loss Harvesting Actually Means
Tax-loss harvesting is the practice of intentionally selling positions that are in the red to lock in losses that offset your realized gains. Done right, it can substantially reduce your tax bill without changing your long-term investment thesis.
Here's a simple example. Say you had a great 2025 and realized $20,000 in crypto gains — mostly short-term, taxed at 32%. That's a $6,400 tax bill. Now say you also have a bag of ETH sitting at a $15,000 unrealized loss after the April sell-off.
If you sell that ETH before December 31, you realize a $15,000 loss. That loss offsets $15,000 of your gains, bringing your taxable gain down to $5,000. At 32%, your new tax bill is $1,600 — a savings of $4,800. Then you can buy back ETH (more on that in a second) and keep your exposure while having pocketed the tax benefit.
This isn't a loophole. It's how the tax code is designed to work. The IRS expects you to match gains with losses; they just don't force you to do it optimally. That's on you.
The Wash Sale Advantage (For Now)
In traditional stocks, the wash sale rule (IRS Section 1091) prevents you from claiming a loss if you buy back the same security within 30 days. Sell AAPL at a loss, rebuy it 29 days later — the loss is disallowed.
Crypto has historically been treated as property, not a security, so the wash sale rule has not technically applied. This means — as of early 2026 — you can sell BTC at a loss and buy it right back the same day, still claiming the loss for tax purposes. It's one of the most valuable quirks of crypto taxation.