Crypto markets in 2025 are doing what they do best: swinging wildly. While some investors are chasing the next altcoin breakout, others are looking at something less flashy—but arguably more powerful when it comes to net returns: tax loss harvesting crypto.
For investors holding digital assets that have declined in value, selling those positions strategically before year-end can reduce or even eliminate capital gains taxes. And thanks to current IRS treatment of crypto as property—not securities—the usual wash sale rules don’t yet apply. That means you can sell at a loss and buy back the same asset without penalty (for now).
But this window is narrowing. Starting January 2025, crypto brokers were required to begin reporting your digital asset activity to the IRS using Form 1099-DA—with mandatory cost basis tracking and tighter FIFO rules coming in 2026. That means less room for error and fewer gray areas for investors.
At Harness, we help you use strategies like tax loss harvesting to take control of your financial future. Our advisors combine crypto-heavy tax expertise with personalized planning tools to help you reduce your taxable gains and stay ahead of regulatory change.
This guide walks you through the important principles of tax loss harvesting crypto, what’s changed in 2025, and how to approach it in a way that’s smart, legal, and aligned with your bigger financial goals.
Table of Contents
- What is tax loss harvesting in crypto?
- Why it matters in 2025
- Short-term vs. long-term capital gains
- New IRS rules crypto investors must know
- How to do tax loss harvesting crypto correctly
- Planning ahead with Harness
What is tax loss harvesting in crypto?
Tax loss harvesting is a technique that lets investors reduce their tax liability by realizing capital losses on underperforming assets. In the world of digital assets, tax loss harvesting crypto works the same way: if you sell a cryptocurrency for less than you paid for it, you can use that loss to offset taxable gains—whether from crypto, stocks, or other capital assets.
The IRS treats cryptocurrency as property, not as a currency or security. This classification means that every crypto trade—whether converting from BTC to ETH, or cashing out to USD—is a taxable event. If you’ve held a token that has declined in value, selling it can trigger a loss that’s deductible against your gains.
Let’s say you realized a $7,000 gain earlier in the year by selling an altcoin at a profit. If you’re currently holding another coin that’s down $5,000 from your purchase price, you can sell it before year-end and harvest the loss—reducing your net taxable gain to just $2,000.
Even better? Any excess losses (beyond your gains) can be used to deduct up to $3,000 per year against ordinary income—and the rest can be carried forward indefinitely. This makes tax loss harvesting crypto a core strategy not just for this year, but for long-term tax planning.
And because crypto is not currently subject to wash sale rules, investors can repurchase the same asset immediately after selling—locking in the loss without disrupting their portfolio strategy. That said, there’s growing momentum in Congress to change this exemption.
In short: if your portfolio is holding coins that have dropped in value, you may be sitting on a real tax advantage. But the secret is knowing which positions to harvest, when to do it, and how to report it correctly.
Why it matters in 2025
There’s never been a more important year to pay attention to tax loss harvesting crypto. While this strategy has been around for years, a wave of regulatory changes and increased IRS scrutiny are transforming it from a “nice-to-have” into a core part of smart crypto tax planning.
Volatility creates opportunity
After several boom-and-bust cycles, many investors in 2025 are holding digital assets below their original purchase price. This isn’t just unfortunate, it’s useful. Selling these assets before year-end can help offset capital gains from other investments, including real estate or equities, and lower your overall tax bill.
And in a year where altcoins and NFTs have seen mixed recoveries, tax-aware investors are using this volatility to create value, not just react to it.
IRS enforcement is ramping up
With the rollout of Form 1099-DA in 2025, crypto brokers are now required to report gross proceeds from digital asset sales to the IRS. And while cost basis tracking and mandatory FIFO (first in, first out) rules won’t be enforced until 2026, this year is the beginning of a new level of visibility into your crypto activity.
What does that mean for you? More accurate records, fewer gray areas—and less margin for error. The IRS is increasingly interested in unreported crypto income, and tax loss harvesting gives you a legitimate, well-documented way to reduce your exposure.
Timing matters
Tax strategies aren’t just about what you do, they’re about when you do it. Crypto losses can only be harvested before December 31, and failing to act in time means missing the opportunity to use them to your advantage this tax year.
With 2025 shaping up as a transitional year for digital asset regulation, it’s an ideal time to get ahead of the curve, review your portfolio, and work with a trusted advisor who understands how to turn market downturns into long-term gains.
Short-term vs. long-term capital gains
Before you jump into tax loss harvesting, it’s important to understand how the IRS distinguishes between short-term and long-term gains—and why that distinction matters for your tax planning.
Short-term gains—higher rates, bigger bite
If you sell a crypto asset you’ve held for one year or less, any gain is considered short-term and taxed at your ordinary income tax rate—which can range from 10% to 37% depending on your total income. For high earners, this can be a significant hit, especially when combined with the 3.8% Net Investment Income Tax (NIIT).
So, if you sold a coin after holding it for eight months and made $10,000, that gain could be taxed at a rate over 40% for some filers.
Long-term gains—lower, more favorable
Assets held for more than one year qualify for long-term capital gains treatment—with tax rates of 0%, 15%, or 20%, depending on your income bracket. For most investors, this results in a substantially lower tax bill on profitable sales.
For example, if you’ve held Ethereum for over a year and realize a $15,000 gain, you may only owe 15% in federal tax—versus up to 37% if sold earlier.
Why it matters for loss harvesting
When harvesting losses, you can use them to offset capital gains in either category—but short-term losses must be used against short-term gains first, and likewise for long-term. If your losses exceed your gains, up to $3,000 can be deducted from your ordinary income each year, with the remaining amount carried forward to future tax years.
This is where a thoughtful, tactically timed approach makes a difference. If you’ve realized a significant short-term gain earlier this year, it may be wise to harvest short-term losses before December 31 to reduce the tax burden immediately.
Harness advisors can help you analyze your portfolio by holding period and gain type, so you’re not only harvesting, you’re doing it with intention.
New IRS rules crypto investors must know
2025-2026 marks a turning point in how the IRS monitors digital asset activity. If you’re serious about tax loss harvesting with crypto, you need to understand how new regulations could impact your strategy—this year and beyond.
Form 1099‑DA: The crypto equivalent of a 1099‑B
Starting January 1, 2025, U.S. crypto brokers (like Coinbase, Kraken, and Gemini) are required to report gross proceeds from all customer transactions to the IRS using a new form: Form 1099‑DA. This aligns crypto reporting more closely with traditional investments. While brokers have reported proceeds before, 1099‑DA formalizes the process—and sets the stage for expanded compliance.
Beginning in 2026, brokers must also report cost basis for digital assets. That means the IRS will be able to match what you paid against what you sold—great for transparency, but less forgiving for taxpayers who haven’t kept detailed records.
Wallet-by-wallet basis tracking and FIFO
Another critical shift: starting in 2025, investors must track cost basis by wallet or exchange account. Previously, many investors used average or pooled cost tracking across platforms. That flexibility is going away.
In 2026, the IRS will enforce first-in, first-out (FIFO) accounting by wallet. This could significantly change how you calculate gains and losses—especially if you’ve used LIFO or chosen specific identification in past years.
Transition relief (updated for Notice 2025-33)
To ease the rollout of digital asset tax reporting, the IRS has extended transitional relief for brokers. Under Notice 2025-33, backup withholding requirements have been delayed until January 1, 2027. Brokers can also rely on uncertified TINs for pre-2026 accounts if verified through the IRS TIN Matching Program, and they’ve been granted more time to classify legacy non-U.S. customers under the new information rules.
However, this did not delay the start of Form 1099‑DA gross proceeds reporting, which still began on January 1, 2025. Brokers must prepare their systems accordingly—and taxpayers should expect increased transparency around crypto sales starting this year.
Why this matters for loss harvesting
- You need accurate cost basis records to prove your loss.
- Poor documentation could lead to denied deductions or audits.
- As reporting tightens, so will IRS enforcement of loss harvesting rules.
Selling your crypto at a loss isn’t enough—you also need to back it up with clear, IRS-compliant records. That includes date acquired, purchase price, sale date, proceeds, and wallet location.
Harness helps you stay ahead of these rule changes by aligning your harvesting strategy with accurate reporting and proactive documentation.
How to do tax loss harvesting crypto correctly
Selling your crypto at a loss might sound simple, but effective tax loss harvesting crypto requires timing and strategy. Here’s how to do it the right way, especially with regulatory changes tightening around digital asset reporting.
Step 1: Identify eligible losses
Start by reviewing your current holdings for unrealized losses—these are assets currently worth less than what you paid for them. You’ll want to focus on positions you no longer believe will recover in the near term, or that you’re comfortable exiting temporarily.
Use portfolio tracking software or your exchange’s trade history to compare your cost basis (what you paid) to the current market value.
Step 2: Sell to realize the loss
To harvest a loss, you must actually sell the asset. This can be done by trading it for USD, another crypto, or transferring it out via a taxable event. Once sold, the capital loss becomes realized—and deductible.
Losses can be used to:
- Offset capital gains (short- and long-term) from crypto or other investments
- Deduct up to $3,000 from ordinary income if total losses exceed gains
- Carry forward any unused losses to future years indefinitely
Make sure you execute the sale before December 31—losses can only be applied to your 2025 return if realized in this calendar year.
Step 3: Avoid repurchasing too soon
Unlike stocks and ETFs, crypto is currently not subject to the wash sale rule—meaning you can sell at a loss and buy back the same asset immediately. This makes crypto harvesting uniquely powerful.
However, regulators are pushing to close this loophole. Proposals in Congress and IRS guidance suggest wash sale rules may apply to digital assets as early as 2026. To stay conservative—and reduce audit risk—some investors choose to wait 30 days before repurchasing the same asset, mirroring traditional wash sale guidelines.
Step 4: Document everything
In 2025, crypto brokers are reporting gross proceeds via Form 1099‑DA, but you’re still responsible for providing cost basis information unless your broker supports it. Keep organized records of:
- Wallet address or exchange
- Asset name and symbol
- Date acquired
- Purchase price
- Sale date and sale amount
- Realized gain or loss
Software can help, but many taxpayers benefit from working with an advisor—especially when transactions span multiple wallets, exchanges, or tokens.
Planning ahead with Harness
Tax loss harvesting crypto is one of the most practical tools available to digital asset investors in 2025. With market swings still common and new IRS reporting rules taking effect, it’s no longer something to consider only at the last minute—it’s something to plan for intentionally.
When done right, harvesting losses can help reduce your taxable gains, free up cash to reinvest, and position you for stronger after-tax outcomes in the years ahead. But with wallet-level cost basis tracking, FIFO rules, and Form 1099‑DA now in play, accuracy and timing matter more than ever.
Harness connects you with crypto-aware advisors and planning tools that simplify the entire process. From reviewing your portfolio to preparing compliant documentation, we help you act strategically—not reactively.
Ready to make smarter moves with your crypto portfolio?
Get started with Harness today.
Disclaimer:
Tax related products and services provided through Harness Tax LLC. Harness Tax LLC is affiliated with Harness Wealth Advisers LLC, collectively referred to as “Harness Wealth”. Harness Wealth Advisers LLC is a paid promoter, internet registered investment adviser. Registration does not imply a certain level of skill or training. This article should not be considered tax or legal advice and is provided for informational purposes only. Please consult a tax and/or legal professional for advice specific to your individual circumstances. This article is a product of Harness Tax LLC.
Content was prepared by a third-party provider and not the adviser. Content should not be regarded as a complete analysis of the subjects discussed. Although we believe the content is reliable, it is not guaranteed as to accuracy and does not purport to be complete nor is it intended to be the primary basis for financial or tax decisions.