Crypto Tax Loss Harvesting: The Complete 2026 Guide

Tax loss harvesting is one of the most powerful legal strategies available to cryptocurrency investors who want to reduce their tax bill. The core concept is simple: sell assets that are currently at a loss to generate realized capital losses, then use those losses to offset capital gains you have already realized during the tax year. If your losses exceed your gains, you can deduct up to $3,000 of net capital losses against your ordinary income and carry the rest forward to future years.

However, the rules governing tax loss harvesting for crypto changed dramatically starting in 2025. The wash sale rule -- long applicable to stocks and securities -- now applies to digital assets. This guide explains exactly how tax loss harvesting works in the 2026 tax year, what the wash sale rule means for your crypto strategy, and how to execute tax loss harvesting effectively under the new rules.

What Is Tax Loss Harvesting?

Tax loss harvesting is the practice of strategically selling investments that have declined in value below their cost basis in order to realize a capital loss. That loss can then be used to offset capital gains from other profitable trades, reducing the total amount of tax you owe for the year.

Here is a simple example. Suppose you sold Bitcoin earlier in the year for a $20,000 profit (a capital gain). You also hold Ethereum that you purchased for $15,000, but it is currently worth $8,000 -- an unrealized loss of $7,000. If you sell the Ethereum now, you realize the $7,000 loss and can subtract it from your $20,000 gain. Your net taxable capital gain drops to $13,000, potentially saving you thousands of dollars in taxes depending on your tax bracket and holding period.

How Capital Losses Work Under IRS Rules

The IRS has specific rules governing how capital losses can be applied:

Offsetting Capital Gains

Capital losses first offset capital gains of the same type. Short-term losses offset short-term gains first, and long-term losses offset long-term gains first. If there are excess losses in one category, they can then offset gains of the other type. For example, if you have $10,000 in short-term gains and $15,000 in short-term losses, the $5,000 excess short-term loss can offset long-term gains.

The $3,000 Deduction Against Ordinary Income

If your total capital losses exceed your total capital gains for the year, you can deduct up to $3,000 of the net capital loss against your ordinary income (wages, salary, freelance income, etc.). This $3,000 limit applies to individuals and married couples filing jointly. For married individuals filing separately, the limit is $1,500.

Carrying Losses Forward

Any net capital loss that exceeds the $3,000 annual deduction is not wasted. It carries forward indefinitely to future tax years. If you have a particularly bad year with $50,000 in net losses, you can deduct $3,000 this year and carry the remaining $47,000 forward, continuing to deduct $3,000 per year or using it to offset future gains.

Scenario	Capital Gains	Capital Losses	Net Taxable Gain	Loss Carryforward
Losses offset gains	$30,000	($20,000)	$10,000	$0
Losses exceed gains	$10,000	($25,000)	-$3,000 deduction	$12,000
No gains, only losses	$0	($40,000)	-$3,000 deduction	$37,000

The 2026 Wash Sale Rule for Cryptocurrency

The wash sale rule is the single most important change affecting crypto tax loss harvesting. Before 2025, the wash sale rule applied only to stocks and securities, not cryptocurrency. This meant that crypto investors could sell Bitcoin at a loss, immediately buy it back, and still claim the loss on their taxes -- a loophole that was enormously popular.

That loophole is now closed. The Infrastructure Investment and Jobs Act of 2021 extended the wash sale rule to digital assets, effective for tax years beginning after December 31, 2024. For the 2026 tax year, the rule is fully in effect.

How the Wash Sale Rule Works

Under the wash sale rule, if you sell or trade a cryptocurrency at a loss and then purchase the same or a "substantially identical" cryptocurrency within a 61-day window -- that is, 30 days before or 30 days after the sale -- the loss is disallowed for tax purposes.

The disallowed loss is not permanently lost. Instead, it is added to the cost basis of the replacement asset. This means you will eventually recognize the loss when you sell the replacement asset (assuming you do not trigger another wash sale), but you cannot use it to offset gains in the current tax year.

What Counts as "Substantially Identical"?

The IRS has not published a comprehensive definition of "substantially identical" in the crypto context, but based on existing guidance for securities and emerging interpretation, the following are generally understood:

• Same token, same chain: Selling BTC and buying BTC is a wash sale. Selling ETH and buying ETH is a wash sale.
• Same token, different chain: Selling native ETH and buying wrapped ETH (WETH) or bridged ETH on another chain is likely considered a wash sale, as the economic exposure is substantially identical.
• Same project, different token: This is a gray area. Selling a token and buying a different token from the same project (for example, selling LIDO's stETH and buying LDO governance tokens) may or may not be substantially identical -- the assets have different economic properties.
• Different cryptocurrencies: Selling BTC at a loss and buying ETH is generally not a wash sale, as the assets are fundamentally different. Similarly, selling a specific altcoin and purchasing a completely different altcoin should be permissible.

Tax Loss Harvesting Strategies for 2026

Even with the wash sale rule now applying to crypto, tax loss harvesting remains a highly valuable strategy. Here are the most effective approaches for the 2026 tax year.

Strategy 1: The 31-Day Wait

The most straightforward approach: sell the losing asset to realize the loss, then wait at least 31 days before repurchasing the same cryptocurrency. During the waiting period, you can hold cash or stablecoins. The downside is that you are exposed to the risk of the asset's price rising during the waiting period, meaning you would have to buy back at a higher price. The upside is that there is zero ambiguity -- the loss is clearly valid.

Example: You hold 2 ETH purchased at $4,000 each ($8,000 total cost basis). ETH is currently at $2,500 ($5,000 total value). You sell both ETH on March 1, realizing a $3,000 loss. You wait until April 1 (31 days later) and repurchase 2 ETH. The $3,000 loss is valid and can offset other gains.

Strategy 2: Swap Into a Different Asset

Sell the losing cryptocurrency and immediately purchase a different, non-substantially-identical asset. This allows you to maintain market exposure to the crypto space without triggering the wash sale rule.

Example: You hold SOL at a loss. You sell SOL and immediately purchase AVAX, a different Layer 1 blockchain with different technology, governance, and economic properties. You realize the loss on SOL, and you maintain exposure to the alt-L1 sector. After 31 days, if you prefer SOL, you can sell AVAX and buy SOL back.

Strategy 3: Asset-Class Rotation

This is a more sophisticated version of Strategy 2. Instead of swapping into a single different asset, you rotate across asset classes within the crypto ecosystem. For instance:

• Sell a Layer 1 token at a loss, buy a DeFi governance token
• Sell a DeFi token at a loss, buy a Layer 2 scaling token
• Sell an NFT-related token at a loss, buy a stablecoin yield position (though note that yield earned is ordinary income)

The key is that each replacement asset must be fundamentally different from the one you sold, not just a minor variation.

Strategy 4: Year-End Portfolio Review

Conduct a thorough review of your portfolio in November or early December. Identify all positions that are currently at a loss and calculate the tax benefit of harvesting each one. Compare the potential tax savings against the transaction costs (gas fees, exchange fees, potential slippage) and the risk of price movement during a waiting period.

Prioritize harvesting:

• Short-term losses that can offset short-term gains (taxed at higher ordinary income rates)
• Large losses that provide the biggest absolute tax savings
• Assets you were planning to exit anyway -- harvesting the loss gives you a tax benefit on a trade you were already going to make

Strategy 5: Continuous Harvesting Throughout the Year

Do not wait until December. Crypto markets are volatile year-round, and opportunities to harvest losses can appear at any time. By monitoring your portfolio regularly and harvesting losses as they arise, you can accumulate more tax savings over the course of the year. Just be careful to track the 61-day wash sale windows for each asset so you do not accidentally trigger a disallowed loss.

A Detailed Example: Tax Loss Harvesting in Action

Let us walk through a complete example to illustrate how tax loss harvesting works under the 2026 rules.

Your situation:

• In January, you sold 1 BTC for $95,000 that you purchased in 2024 for $40,000. This is a $55,000 long-term capital gain (held over 1 year).
• You hold 50 SOL purchased in March 2025 at $180 each ($9,000 cost basis). SOL is now trading at $100 ($5,000 current value). Unrealized loss: $4,000.
• You hold 10,000 LINK purchased in June 2025 at $22 each ($220,000 cost basis). LINK is now at $15 ($150,000 current value). Unrealized loss: $70,000.
• Your federal tax bracket is 32%.

Without tax loss harvesting:

Your $55,000 long-term capital gain is taxed at 15% (long-term rate for the 32% bracket). Tax owed: $8,250.

With tax loss harvesting:

You sell the SOL and LINK positions, realizing $4,000 + $70,000 = $74,000 in capital losses. These are short-term losses (held less than 1 year). Short-term losses first offset short-term gains (you have none), then offset long-term gains.

Net capital position: $55,000 gain - $74,000 losses = -$19,000 net capital loss.

You deduct $3,000 against ordinary income and carry forward $16,000 to 2027.

Tax on capital gains this year: $0.

Additional tax savings from the $3,000 ordinary income deduction at 32%: $960.

Total tax savings compared to not harvesting: $8,250 + $960 = $9,210.

You wait 31 days and repurchase SOL and LINK at current market prices. Your new cost basis reflects the lower purchase price, and you carry $16,000 in losses forward to offset gains in future years.

Common Mistakes to Avoid

1. Triggering a Wash Sale Accidentally

The wash sale window extends 30 days before the sale as well. If you buy more of an asset and then sell your original lot at a loss within 30 days of that purchase, the wash sale rule may apply. Track all purchases carefully.

2. Forgetting About DeFi Activity

If you sell a token at a loss but have that same token deposited in a DeFi protocol (staking, lending, or liquidity pool), you may still have economic exposure to it. While the IRS has not specifically addressed whether DeFi positions count as repurchases for wash sale purposes, conservative tax professionals advise treating them as such.

3. Ignoring Transaction Costs

Every trade involves costs: exchange fees, gas fees, and potential slippage. If you are harvesting a small loss, the transaction costs may eat into or even exceed the tax savings. Make sure the math works before executing the trade.

4. Failing to Document Everything

You must be able to demonstrate to the IRS that you did not trigger a wash sale. Keep records of the date and time of every sale and repurchase, the specific assets involved, the prices, and the 31-day gap. Screenshots, CSV exports, and blockchain transaction hashes are all valuable documentation.

5. Harvesting Losses on Assets You Believe Will Moon

If you sell an asset to harvest a loss and use the 31-day wait strategy, you risk missing a significant price increase. If you are highly bullish on an asset, the opportunity cost of being out of position for 31 days may outweigh the tax savings. Consider the swap strategy (Strategy 2) instead, which maintains market exposure.

Tax Loss Harvesting and Cost Basis Methods

Your choice of cost basis method directly affects which lots have unrealized losses. With FIFO, your oldest lots are sold first, which may or may not be the ones with losses. With Specific Identification, you can choose to sell the specific lots that have the largest losses, maximizing your harvesting potential.

If you have acquired the same cryptocurrency at multiple price points throughout the year, specific identification is typically the most advantageous method for tax loss harvesting because it gives you full control over which lots to sell.

Should You Hire a Tax Professional?

If your crypto portfolio is large, you trade frequently, or you participate in DeFi protocols, the complexity of navigating wash sale rules, cost basis tracking, and tax optimization strategies is significant. A qualified tax professional or CPA with cryptocurrency experience can:

• Ensure your tax loss harvesting is executed correctly
• Verify that no wash sale violations occurred
• Optimize your cost basis method across your entire portfolio
• Calculate the interaction between federal, state, and NIIT taxes
• Handle complex DeFi transactions and their tax implications

The cost of professional tax preparation is typically far less than the potential savings from properly executed tax loss harvesting and the penalties avoided from incorrect reporting.

Final Thoughts

Tax loss harvesting remains one of the best tools in a crypto investor's arsenal, even with the wash sale rule now applying to digital assets. The key changes for 2026 are that you can no longer sell and immediately repurchase the same cryptocurrency, and you need to be mindful of the 61-day window when planning trades.

The strategies outlined in this guide -- the 31-day wait, swapping into different assets, asset-class rotation, year-end reviews, and continuous harvesting -- provide a comprehensive toolkit for legally reducing your crypto tax burden. Combined with the right cost basis method and thorough record-keeping, tax loss harvesting can save you thousands of dollars every year.

This guide is for informational purposes only and does not constitute tax, legal, or financial advice. Tax laws are complex and subject to change. Consult a qualified tax professional for advice specific to your situation.