Crypto investors often feel the rush of big wins. But let’s be real, losses are just part of the deal. So, what if you could actually use those losses to your benefit? That’s where crypto tax-loss harvesting steps in. It’s a clever way to cut down your taxes and make your portfolio work better for you.
Tax-loss harvesting isn’t just for stock investors; it applies to cryptocurrency as well. Given the IRS and other tax authorities’ increasing scrutiny of crypto transactions, understanding and utilizing this strategy can save you significant money. But how exactly does it work? And what should you be aware of when implementing it in 2025?
In this guide, we’ll break down everything you need to know about crypto tax-loss harvesting, from how it works to legal considerations and expert tips to maximize your tax benefits.
What is Crypto Tax-Loss Harvesting?
Crypto tax-loss harvesting is a strategic method that helps investors offset capital gains by selling assets at a loss. The goal is to use those losses to reduce your taxable income, thereby lowering the amount you owe in capital gains tax.
Here’s the deal :
1. Sell a cryptocurrency for less than you paid. If you have a crypto that’s dropped in value, go ahead and sell it to take that loss.
2. Use that loss to lower gains. You can use these losses to wipe out taxable profits from other crypto trades.
3. Buy again if you want. You can invest in the same or different crypto to keep your portfolio while still using that loss for your taxes. Just make sure to follow the tax rules!
Here’s how crypto tax-loss harvesting works-
Let’s say you bought Ethereum (ETH) for $5,000 at the start of 2024. Later, its price falls to $3,000 by year’s end. If you decide to sell it, you take a $2,000 loss.
Now, if you also made $2,000 in profit from trading Bitcoin (BTC), that loss from ETH can cancel out your Bitcoin gains. So, in the end, you won’t have to pay taxes on those profits.
Crypto as Property: Capital Gains Tax Rules
The IRS sees cryptocurrency as property. That means it’s taxed like stocks and real estate. When you sell, trade, or get rid of your crypto, you have to pay taxes on it.
There are two kinds of capital gains taxes. They depend on how long you keep the asset:
| Type of Gain | Holding Period | Tax Rate |
| Short-Term Capital Gains | Less than 1 year | Taxed as ordinary income (10%–37%) |
| Long-Term Capital Gains | More than 1 year | Lower rates (0%, 15%, or 20%) depending on income |
Step-by-Step Process for Crypto Tax-Loss Harvesting
Crypto tax-loss harvesting can help you lower your taxable income. You sell assets that have lost value to balance out your capital gains. This way, you can reduce the taxes you owe. It’s a smart move for crypto traders to manage their tax bills while following the rules set by the IRS.
1. Identify Unrealized Losses in Your Portfolio
The first step is to analyze your crypto holdings and identify assets that are trading at a loss—meaning their current market value is lower than your purchase price (cost basis).
- ZenLedger’s tax-loss harvesting feature can automate this process, scanning your portfolio and highlighting potential tax-saving opportunities.
- If you manually track your trades, you can use cost basis methods like FIFO (First-In-First-Out), LIFO (Last-In-First-Out), or HIFO (Highest-In-First-Out) to determine your taxable gains and losses.
2. Sell or Dispose of Crypto at a Loss
Once you’ve identified underperforming assets, the next step is to sell, trade, or dispose of them to realize a loss.
- The loss will be recorded and can be used to offset capital gains from profitable trades.
- If your losses exceed your total capital gains, you can deduct up to $3,000 per year from your regular income ($1,500 if married filing separately).
- Any remaining losses beyond this limit can be carried forward to future tax years, allowing for continued tax savings.
3. Reinvest the Proceeds
Unlike traditional stocks, crypto is not explicitly covered under the IRS wash sale rule (as of 2025). This means you can sell your crypto at a loss and immediately buy it back without triggering a tax penalty. However, tax laws evolve, and the IRS may enforce wash sale rules on crypto in the future. Therefore, this is not something we advise.
4. Report Losses on Your Tax Return
Once you’ve harvested losses, you’ll need to report them accurately on your tax return:
- Use IRS Form 8949 to detail each taxable crypto transaction.
- Transfer totals to Schedule D (Capital Gains and Losses) when filing your return.
Benefits of Crypto Tax-Loss Harvesting
Lower Capital Gains Taxes – Pay less on your profitable trades.
Offset Ordinary Income – You can write off up to $3,000 in losses from your regular income each year.
Carry Forward Losses – If you have extra losses, you can use them in future tax years.
Portfolio Optimization – Sell coins that aren’t doing well. Then, put that money into better ones.
Crypto Tax-Loss Harvesting Risks & Potential Drawbacks
Crypto tax-loss harvesting can save you money on taxes, but you should also know about the risks and limits. Knowing these will help you make smart choices and stay on the right side of the law.
1. The Risk of Market Rebounds
- Selling a crypto asset at a loss means you may miss out on future gains if the price rebounds after you sell.
- If you plan to reinvest in the same asset, there’s a risk that the price may rise before you buy it back, leading to higher repurchase costs.
2. IRS Scrutiny & Changing Regulations
- While crypto is not explicitly covered under the IRS wash sale rule (as of 2025), regulatory changes could occur.
- If the IRS introduces new rules applying the wash sale rule to crypto, tax-loss harvesting strategies could be impacted.
- The IRS has also increased enforcement efforts, requiring exchanges and taxpayers to report crypto transactions accurately.
3. Short-Term vs. Long-Term Capital Gains Considerations
- Not all capital gains are taxed the same way. Short-term gains (on assets held for less than a year) are taxed at ordinary income tax rates, while long-term gains (held for over a year) are taxed at lower capital gains rates.
- If you sell an asset at a loss and immediately rebuy it, future profits may be taxed at higher short-term rates rather than favorable long-term rates.
4. Limited Loss Deductions Per Year
- The IRS only allows you to deduct up to $3,000 in net capital losses per year against ordinary income ($1,500 if filing separately).
- If your losses exceed this amount, the remaining losses can be carried forward to future years, but they won’t provide immediate tax relief.
Tax-Loss Harvesting Rules & Best Practices
To maximize your tax benefits while staying compliant, it’s important to understand the key rules and best practices for crypto tax-loss harvesting.
1. Crypto Wash Sale Rule
The Wash Sale Rule is a regulation that prevents investors from claiming a tax deduction on a loss if they sell a security at a loss and then repurchase the same or a “substantially identical” security within 30 days before or after the sale.
- As of 2025, crypto is NOT explicitly covered under the traditional wash sale rule that applies to stocks and securities.
- This means you can sell a crypto asset at a loss and immediately repurchase it without penalty.
- However, regulators may close this loophole in the future, so it’s best to stay informed.
2. FIFO, LIFO, and HIFO Tax Strategies
- The IRS allows different accounting methods for calculating your gains and losses, including:
FIFO (First-In-First-Out): The oldest assets are sold first (higher taxable gains).
LIFO (Last-In-First-Out): The most recently acquired assets are sold first (lower gains).
HIFO (Highest-In-First-Out): The most expensive assets are sold first (maximizing losses).
It’s important to note that once you choose a tax accounting method, it is advisable to use the same one each year for consistency and compliance with IRS guidelines. Changing methods frequently may complicate your tax reporting.
Read next: how to calculate LIFO and FIFO, FIFO vs LIFO
3. Reporting Requirements & Tax Forms
- Every crypto transaction must be accurately reported to the IRS using the appropriate tax forms:
Form 8949 – Report each taxable transaction.
Schedule D – Summarize capital gains and losses.
Form 1040 – Report taxable income, including any crypto-related deductions.
How ZenLedger Simplifies Crypto Tax-Loss Harvesting
Navigating crypto tax-loss harvesting manually can be overwhelming—following transactions, calculating gains and losses, and ensuring compliance with tax laws requires precision. This is where ZenLedger makes the process seamless, saving you time, effort, and money.
1. Automated Monitoring of Cryptocurrency Transactions
Manually recording every crypto trade and calculating tax implications can be tedious. ZenLedger automates this by:
1. Syncing with many crypto exchanges, wallets, and DeFi platforms
2. Importing your transaction history automatically
3. Organizing trades across multiple exchanges into a clear, unified tax report
Instead of sifting through endless spreadsheets, you get an accurate breakdown of taxable gains and losses in seconds.
2. Real-Time Tax-Loss Harvesting Insights
ZenLedger’s built-in tax-loss harvesting tool helps you make smart decisions by:
Identifying opportunities to sell assets at a loss before the tax year ends
Simulating different trade scenarios to maximize tax savings
Providing recommendations based on FIFO, LIFO, or HIFO strategies
With this real-time insight, you can minimize your taxable gains while staying fully compliant with IRS regulations.
3. Automatic IRS Tax Form Generation
Once you’ve optimized your tax-loss harvesting strategy, ZenLedger makes filing easy by:
Automatically generating Form 8949 & Schedule D for reporting capital gains/losses
Filling out your IRS Form 1040 with accurate crypto tax calculations
Providing CPA-ready tax reports that integrate with TurboTax and other tax software
ZenLedger takes care of all of the work, so you don’t have to worry about complicated tax forms anymore!
4. Audit-Proof Record Keeping
The IRS is increasing its scrutiny of crypto transactions, making it crucial to keep detailed records. ZenLedger ensures that:
Every crypto transaction is securely recorded and categorized
You have an IRS-compliant tax report ready in case of an audit
Your tax calculations remain accurate, even as regulations changeWith ZenLedger, you can avoid IRS penalties and confidently handle audits if they arise.
How to Claim Crypto Losses on Taxes with ZenLedger?
Our tax-loss harvesting tool lets you know how many unrealized capital losses you have in each token type. Then, you can decide if you want to sell the positions and realize the loss or determine how much you want to offset your capital gains or other ordinary income.
Step 1: Launch the Tool
Start by signing into ZenLedger and importing your transactions. After you have transactions, click on Tax in the top menu and then look in the Utilities box for the Tax Loss Harvesting option. You can then run the tax-loss harvesting tool to generate the spreadsheet.
Step 2: Read the Results
Click the Download Spreadsheet button to download the spreadsheet when it’s ready.
Each tab represents a different accounting method — use your preferred method (most customers use FIFO, but HIFO and LIFO are also available) to see your total potential losses to harvest, organized by cryptocurrency. You can toggle between accounting methods in the spreadsheet using the tabs at the bottom of the screen.
The summary tabs show you all the cryptocurrencies you own with unrealized loss using your preferred accounting method. Meanwhile, the other tabs show you the raw data we use to create your summaries, enabling you to see the actual transactions.
Step 3: Realize Losses by Selling Your Crypto Once
The tax loss harvesting spreadsheet tells you what losses you can harvest, but it’s up to you to take action. But, the platform doesn’t provide direct access to execute the transactions because these coins aggregate across all your exchanges and wallets. Instead, you must sign in to each coin’s exchange or wallet location and complete the transactions.
Share this data with your tax professional to decide on the best approach, or log in to your exchange(s) and sell your coin(s) to harvest the losses yourself. For example, you may only want to harvest some losses. Or, avoid selling long-term positions since the clock resets on your capital gains tax rate.
To learn more about the rules and requirements around crypto tax-loss harvesting, watch our 22-minute on-demand webinar with Pat Larsen, CEO and co-founder of ZenLedger, and Andrew Gordon, JD/CPA, President of Gordon Law Group, Ltd.
“…it’s not just crypto, but crypto is a very liquid investment for crypto tax-loss harvesting. After realizing the loss, investors can purchase a similar asset to maintain optimal asset allocation and expected returns.” – Andrew Gordon, JD/CPA, President of Gordon Law Group.
Common Mistakes to Avoid in Crypto Tax-Loss Harvesting
While tax-loss harvesting is a powerful strategy, many investors make costly mistakes that can reduce its effectiveness—or worse, trigger tax penalties. Below are some of the most common pitfalls and how to avoid them:
1. Violating the Wash Sale Rule (Even for Crypto)
The Mistake: Selling a crypto asset at a loss and rebuying the same (or a substantially identical) asset within 30 days before or after the sale.
Why It’s a Problem: If wash sale rules apply to crypto in the future (as they do with stocks), the IRS could disallow your capital loss, making your tax strategy ineffective.
How to Avoid It:
- Wait at least 30 days before repurchasing the same crypto.
- Consider buying a different but correlated asset instead (e.g., selling Bitcoin and buying Ethereum).
2. Forgetting to Offset Ordinary Income
The Mistake: Only using losses to offset capital gains but not realizing that up to $3,000 of losses can be applied against ordinary income (like your salary).
Why It’s a Problem: You could miss out on immediate tax savings and end up paying more than necessary.
How to Avoid It: ZenLedger automatically calculates how much of your losses can offset both capital gains and ordinary income, ensuring you maximize your tax benefits.
3. Not Carrying Forward Excess Losses
The Mistake: Assuming unused capital losses disappear if they exceed your gains.
Why It’s a Problem: In reality, losses can be carried forward indefinitely to offset future gains—but only if properly reported.
How to Avoid It:
- Use losses in future years to strategically reduce long-term tax liabilities.
4. Not Keeping Detailed Records
The Mistake: Relying on exchange-generated reports alone, which may be incomplete or inaccurate.
Why It’s a Problem: If audited, you need detailed records of every trade, transfer, and fee. Missing data could lead to penalties or tax disputes.
How to Avoid It:
- Regularly review your tax reports before filing.
5. Failing to Consider Tax Brackets and Timing
The Mistake: Harvesting losses without considering when they will provide the most benefit.
Why It’s a Problem: Selling at a loss in a low-income year may not be as beneficial as saving losses for a future high-income year.
How to Avoid It:
- Time your tax-loss harvesting to align with tax bracket changes.
6. Overlooking State Tax Implications
The Mistake: Assuming that federal tax-loss harvesting rules apply the same way at the state level.
Why It’s a Problem: Some states do not allow capital loss deductions or have different rules.
How to Avoid It:
- Consult a tax professional for state-specific advice.
The Future of Crypto Tax-Loss Harvesting: What Should We Expect?
The crypto market is growing. As it does, tax laws about it are changing, too. Tax agencies are trying to make rules clearer for digital assets. This affects how people use tax-loss harvesting.
What Changes Might We See in Tax Laws?
1. Tighter reporting rules.
2. Clearer Like-Kind Exchange rules.
3. Effects of global regulations.
Conclusion
Crypto tax-loss harvesting can really help you save on taxes if you’re into crypto. It works best when the market is a bit up and down. Knowing how it works, following the rules, and using tools like ZenLedger can help you save more money while staying on the right side of the law.
Tax-loss harvesting can really help crypto investors during tax season. It allows you to save money and get your taxes sorted out better. With the right tools and some know-how, tax-loss harvesting can be a great way to boost your finances.
ZenLedger can help you easily calculate your crypto taxes, and also find opportunities for you to save money and trade smarter. Get started for free now or learn more about our tax professional-prepared plans!
Disclaimer: This material has been prepared for informational purposes only, and is not intended to provide tax, legal, or financial advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.