How crypto tax-loss harvesting works

A capital loss arises when you dispose of a coin for less than its cost basis. The IRS treats crypto as property, so the capital gain and loss rules apply. You realize the loss when you sell the coin for dollars, swap it for another coin or spend it.

A coin that has fallen in value but stays in your wallet gives no deduction. The loss counts only after you sell, swap or spend the coin.

If you buy the coin back, the new lot has a new cost basis and a new holding period. The basis is the buyback price. A lower basis means a larger gain if you later sell the new lot at a higher price.

Offset rules, the $3,000 limit and carryforward

A harvested loss first reduces your capital gains for the year. If your losses are larger than your gains, the excess is a net capital loss. You can deduct the lesser of $3,000 or the net loss from other income, such as wages. The limit is $1,500 if you are married and file separately.

A net loss above the limit carries forward to later years.

For example, in tax year 2026 you have $2,000 of crypto gains and you harvest $10,000 of losses. The net loss is $8,000. You deduct $3,000 from other income. The remaining $5,000 carries forward to tax year 2027.

Worked example: a loss that offsets a gain

In tax year 2026, you file as single, with taxable income of $90,000. The $90,000 includes a $5,000 long-term gain from a BTC sale earlier in the year. You also hold SOL that you bought for $4,000 more than one year ago. The SOL is now worth $1,000.

• No harvest: $5,000 gain × 15% = $750 tax.
• Sell the SOL: $1,000 - $4,000 = a $3,000 long-term loss.
• Net gain: $5,000 - $3,000 = $2,000.
• Tax: $2,000 × 15% = $300.

The harvest lowers the tax on the gain by $450 in this example. The 15% rate applies because taxable income stays between $49,450 and $545,500 for 2026, with or without the sale. If you buy SOL back at $1,000, the new lot has a $1,000 basis.

The wash sale rule and crypto

The wash sale rule is section 1091 of the Internal Revenue Code. The rule applies to "shares of stock or securities". Section 1091 denies the loss if you acquire substantially identical stock or securities within 30 days before or after the sale. The statute does not name digital assets.

IRS Publication 550 (2025) describes the wash sale rule for stock or securities. The same publication says digital assets are property, not currency. No IRS guidance cited here applies section 1091 to crypto.

Congress.gov lists public laws P.L. 119-1 through P.L. 119-134, with the latest action on Oct 20, 2026. None of them amends section 1091 or extends the wash sale rule to digital assets. Congress could change the rule in a later bill. The law in force for the year of the sale decides how a buyback within 30 days is treated.

A token that is itself a security, such as a tokenized stock, may fall under section 1091. That point is our reading of the statute text.

Economic substance: a sale and an instant buyback

A sale and a buyback seconds later leave you with the same coin and the same market risk. Only the tax result changes.

The term for this question is economic substance. Economic substance asks whether a transaction changes your economic position apart from the tax result. The IRS can examine a return and question a loss.

A longer gap before the buyback, or a buy of a different coin, means your money carried a different risk for that time. No IRS source that we cite sets a safe waiting period for crypto. A tax professional can review the timing of a large loss before the sale.

Timing, wallets and Form 1099-DA

The Dec 31 deadline. A loss counts in the tax year of the sale. For calendar-year filers, the sale must happen by Dec 31. A loss from a sale on Dec 31, 2026 goes on the return for tax year 2026, filed in 2027.

Short-term or long-term. The holding period of the coin you sell decides the type of loss. A coin held one year or less gives a short-term loss. A coin held more than one year gives a long-term loss.

Per-wallet lots. From Jan 1, 2025, you identify the units you sell per wallet or account, with specific identification or FIFO. A tool that tracks lots per wallet shows which units carry a loss.

Form 1099-DA. Brokers report gross proceeds on Form 1099-DA. For 2026 sales, they must report basis only for coins acquired after 2025 and held in the same custodial account. For older coins, the loss depends on your own basis records. The Form 8949 guide explains how to report each sale.