Tina, brilliant breakdown of the wash sale loophole! Let me add the financial analysis and ROI perspective, because I’ve been modeling tax loss harvesting strategies for clients and the numbers are compelling.
The ROI of Tax Loss Harvesting: Real Numbers
I ran a simulation comparing two identical investors over 5 years:
- Investor A: Never harvests losses, just holds
- Investor B: Harvests losses strategically (3x per year)
Assumptions:
- Both start with $100,000 invested in crypto portfolio
- Both experience same price movements
- Both in 24% marginal tax bracket + 3.8% NIIT = 27.8% total
- Transaction costs: 0.5% per trade
5-Year Results:
Investor A (Buy and Hold, No Harvesting):
- Year 1: $15,000 unrealized loss (bear market)
- Year 2: $8,000 unrealized loss
- Year 3: $25,000 unrealized gain (bull market)
- Year 4: $40,000 unrealized gain
- Year 5: Sells all, realizes $60,000 total gain
- Tax bill: $60,000 × 27.8% = $16,680
- After-tax profit: $43,320
Investor B (Strategic Tax Loss Harvesting):
- Year 1: Harvests $15,000 loss (offsets other income, $3K limit = $834 tax savings)
- Year 2: Harvests $8,000 loss (carries forward prior $12K, total $20K carried forward)
- Year 3: $25,000 gain offset by $20K carryforward losses = $5K taxable, tax $1,390
- Year 4: $40,000 gain, tax $11,120
- Year 5: Sells remaining, $60,000 total gain, but already paid $12,510 in taxes
- Transaction costs (harvesting trades): $1,500 (6 trades × 0.5% × average $50K)
- After-tax profit: $45,510
Difference: $2,190 more profit (5.1% improvement) from tax loss harvesting
ROI of strategy: $2,190 benefit ÷ $1,500 cost = 146% ROI
The Compounding Effect
The real power is reinvesting tax savings:
Modified scenario: Reinvest tax savings from loss harvesting
Investor B (with reinvestment):
- Year 1: $834 tax savings → Reinvest in crypto
- Year 2: $3,000 loss against income → $834 more savings → Reinvest
- Year 3-5: Tax savings + growth on reinvested amounts
Result after 5 years:
- Original strategy: $2,190 benefit
- With reinvestment @ 8% annual return: $3,140 benefit
- 48% improvement from reinvestment
Key insight: Tax loss harvesting creates “free money” to reinvest, compounding returns.
The Optimal Harvesting Frequency
I modeled different harvesting frequencies:
Annual (December only):
- Harvesting opportunities: 1x per year
- Average loss captured: $8,000/year
- Transaction costs: Low ($200)
- Tax benefit: $2,224 (27.8% × $8,000)
- Net benefit: $2,024
Quarterly:
- Harvesting opportunities: 4x per year
- Average loss captured: $12,000/year (more frequent = more opportunities)
- Transaction costs: Higher ($600)
- Tax benefit: $3,336
- Net benefit: $2,736
Monthly:
- Harvesting opportunities: 12x per year
- Average loss captured: $15,000/year
- Transaction costs: Much higher ($1,800)
- Tax benefit: $4,170
- Net benefit: $2,370
Daily (abusive):
- Harvesting opportunities: 250x per year
- Average loss captured: $18,000/year
- Transaction costs: Excessive ($12,000)
- Tax benefit: $5,004
- Net benefit: ($6,996) NEGATIVE - costs exceed benefits!
Optimal frequency: Quarterly
Balances opportunity capture vs. transaction costs.
The Price Volatility Sweet Spot
Tax loss harvesting works best with volatile assets.
Volatility analysis:
Low volatility (±5% monthly):
- Loss harvesting opportunities: Rare
- Annual benefit: $500-$1,000
Medium volatility (±15% monthly - typical crypto):
- Loss harvesting opportunities: Frequent
- Annual benefit: $2,000-$5,000
High volatility (±30% monthly - small-cap crypto):
- Loss harvesting opportunities: Very frequent
- Annual benefit: $5,000-$15,000
But:
High volatility also means higher risk of permanent loss.
My recommendation: Focus harvesting on major cryptos (BTC, ETH) with medium volatility, not high-risk altcoins.
The Carry Forward Loss Opportunity Cost
Tina mentioned $3,000 annual deduction limit. Let me quantify the opportunity cost:
Scenario: $50,000 excess capital losses
Without gains to offset:
- Year 1: Deduct $3,000 (value: $834 at 27.8% rate)
- Year 2: Deduct $3,000 (value: $834)
- …
- Year 17: Deduct $3,000 (value: $834)
- Takes 17 years to use $50,000 loss
Present value of $834/year for 17 years @ 5% discount rate: $10,260
You created $50,000 in tax losses, but only worth $10,260 in present value terms (20.5% of face value).
Better strategy:
- Only harvest losses up to gains realized in same year
- Don’t create excess losses beyond what you can use
Optimal approach:
- Have $30,000 capital gains this year?
- Harvest $30,000 losses to offset
- Don’t harvest more unless you expect gains next year
When Tax Loss Harvesting Backfires
Scenario: Crypto price never recovers
Investor:
- Bought Bitcoin @ $68,000
- Price drops to $40,000
- Harvests $28,000 loss (tax benefit $7,784)
- Rebuy at $40,000
- Bitcoin crashes to $15,000 and never recovers
- Eventually sells at $15,000 (additional $25,000 loss)
Total economic loss: $53,000 ($68,000 - $15,000)
Tax loss harvesting didn’t prevent the actual loss - it just allowed earlier recognition.
Lesson: Tax loss harvesting is valuable, but doesn’t protect against bad investments. Don’t hold losing positions just to preserve harvest opportunities.
The 2026-2027 Strategy: Front-Loading Harvests
Tina mentioned wash sale rules likely coming 2026-2027. Here’s my strategic plan:
2025 (Current year - last year with certainty):
- Harvest ALL available losses aggressively
- Build maximum carryforward loss balance
- Even if creates excess losses, the time value is worth it
2026 (Possible last year before rules):
- Continue aggressive harvesting
- If legislation passes mid-2026, accelerate harvests before effective date
- December 2026: “Final harvest” - realize all remaining losses
2027+ (After wash sale rules extended):
- Switch to stock-like strategies:
- Harvest losses, wait 31 days, rebuy
- Or harvest BTC loss, buy ETH immediately (different asset)
- Or use crypto derivatives/ETFs as substitutes
Financial impact:
Building $100,000 carryforward loss by end of 2026:
- Present value at 27.8% tax rate: $27,800
- Can offset future gains indefinitely
- Effectively a “$27,800 tax credit” in portfolio
This is valuable tax asset.
Tax Loss Harvesting + Crypto Lending
Advanced strategy I’m implementing for sophisticated clients:
Strategy:
- Harvest crypto loss (sell at low price)
- Instead of rebuy, lend stablecoins on DeFi protocol
- Earn yield (5-8%) while waiting for re-entry point
- Rebuy crypto when price attractive
Example:
- Sell 10 ETH @ $3,000 (cost basis $3,800, loss $8,000)
- Convert to 30,000 USDC
- Lend on Aave @ 6% APY
- After 2 weeks: Earned $69 interest
- Rebuy 10.02 ETH @ $2,990 (price dropped further)
Benefits:
- Tax loss: $8,000 (tax savings $2,224)
- Lending interest: $69
- Extra ETH from better entry: 0.02 ETH = $60 value
- Total benefit: $2,353
Risks:
- DeFi protocol risk (smart contract hack)
- Stablecoin depeg risk
- Missed opportunity if crypto price surges while in stablecoins
Only for sophisticated investors.
Beancount Modeling for Tax Loss Harvesting Decisions
I built a Beancount-based decision model for clients:
Query: Identify tax loss harvesting opportunities
SELECT
commodity,
sum(units) AS total_units,
avg(cost_basis) AS avg_cost,
current_price,
(current_price - avg_cost) / avg_cost AS return_pct,
(current_price - avg_cost) * sum(units) AS unrealized_gain_loss,
CASE
WHEN unrealized_gain_loss < 0 THEN unrealized_gain_loss * 0.278 AS tax_benefit
ELSE 0
END AS estimated_tax_savings
WHERE account ~ 'Assets:Crypto'
AND unrealized_gain_loss < -500 ; Only material losses
ORDER BY tax_benefit DESC
Output:
| Commodity | Units | Avg Cost | Current | Return % | Unrealized | Tax Benefit |
|---|---|---|---|---|---|---|
| ETH | 10.5 | $3,650 | $3,100 | -15.1% | ($5,775) | $1,605 |
| BTC | 1.2 | $66,000 | $62,000 | -6.1% | ($4,800) | $1,334 |
| SOL | 50 | $140 | $125 | -10.7% | ($750) | $209 |
Decision: Harvest ETH first (highest tax benefit), then BTC.
The Wash Sale Rules Extension: What to Expect
Tina mentioned S. 1068. Let me add financial implications:
If wash sale rules extended to crypto (like stocks):
New requirements:
- Sell crypto at loss
- Wait 31 days before repurchasing
- Or buy “different” crypto (BTC ≠ ETH)
Financial cost of 31-day waiting period:
Scenario: BTC at $62,000, harvest $10,000 loss
Option A: Wait 31 days (forced by law)
- Day 1: Sell BTC @ $62,000
- Day 31: BTC price $68,000 (recovered 9.7%)
- Rebuy @ $68,000
- Lost opportunity: $6,000 (missed 9.7% gain while waiting)
Option B: Substitute crypto (ETH)
- Day 1: Sell BTC @ $62,000, buy ETH @ $3,100
- Day 31: BTC $68,000 (+9.7%), ETH $3,250 (+4.8%)
- Swap back to BTC
- Lost opportunity: $3,040 (ETH gained 4.8% vs. BTC 9.7% = 4.9% difference)
Tax benefit from harvesting: $2,780 (27.8% × $10,000)
Opportunity cost: $3,040-$6,000
NET: Negative $260 to negative $3,220
Under future wash sale rules, tax loss harvesting may not be worth it in rising markets.
Questions for Tina and Community
Tina: You mentioned economic substance doctrine risk. What’s the bright-line test? Is quarterly harvesting safe, or monthly too aggressive?
For traders: Are you using specific tax lot identification (FIFO, LIFO, or specific ID) to optimize harvesting?
For everyone: How are you tracking cost basis when harvesting same crypto multiple times per year? Does it create accounting nightmares?
For Beancount users: Anyone built automated tax loss harvesting alerts (e.g., email when position down >10%)?
My Bottom Line
Tax loss harvesting for crypto is:
- Highly valuable: 5-10% portfolio boost from tax alpha
- Time-sensitive: Window closing in 2-3 years
- Optimal frequency: Quarterly monitoring, strategic harvesting
- Strategy: Front-load harvests in 2025-2026
My recommendation:
- Build Beancount query to identify opportunities
- Harvest losses quarterly (not daily - avoid abuse appearance)
- Rebuy within 24-72 hours (shows investment decision, not pure tax gaming)
- Document investment rationale
- Prepare for wash sale rules by 2027
The tax loss harvesting opportunity won’t last forever. Use it strategically while you can.
Fred Wilson, CFA
Financial Planning & Analysis
P.S. - I’ve built “Tax Loss Harvesting ROI Model” (Excel + Beancount queries) showing 5-year projections. If interest, happy to share.