Tina and Fred - excellent analysis! I need to add the CPA client communication perspective, because tax loss harvesting is one of the hardest tax strategies to explain to clients. They either don’t understand it, or they abuse it.
The Client Education Problem
What clients hear:
“You can sell crypto at a loss and immediately buy it back? That’s free money!”
What clients do:
Trade excessively, create accounting nightmares, trigger economic substance concerns.
My solution: Structured client education process.
My Tax Loss Harvesting Client Advisory
I provide written advisory to every client before implementing strategy:
Sample advisory (excerpt):
TAX LOSS HARVESTING STRATEGY - CLIENT ADVISORY
Client: [Name]
Date: October 20, 2025
Prepared by: Alice Thompson, CPA
STRATEGY OVERVIEW:
Tax loss harvesting involves intentionally selling cryptocurrency at a loss to reduce taxable income, then repurchasing the same or similar crypto to maintain investment exposure.
CURRENT LAW (2025):
Wash sale rules (IRC § 1091) do NOT apply to cryptocurrency. You may sell crypto at a loss and immediately repurchase without waiting 30 days.
FUTURE RISK:
Congress is considering extending wash sale rules to crypto (S. 1068). If passed, the ability to immediately repurchase will end.
RECOMMENDED APPROACH:
- Monitor portfolio quarterly for tax loss opportunities
- Harvest losses strategically (2-4 times per year maximum)
- Rebuy within 24-72 hours (not same-second trading)
- Document investment rationale for each trade
- Maintain detailed records for IRS audit defense
TAX BENEFITS:
- Offset capital gains (unlimited)
- Offset up to $3,000 ordinary income annually
- Carry forward excess losses indefinitely
RISKS:
- Transaction fees reduce net benefit
- IRS could challenge under economic substance doctrine if abused
- Future law changes may disallow strategy
- Repurchase price may be higher (opportunity cost)
CLIENT RESPONSIBILITIES:
- Approve each harvest transaction in advance
- Maintain records of all transactions
- Report all sales on Form 8949
- Pay exchange fees from separate funds (not investment account)
CPA RESPONSIBILITIES:
- Identify harvest opportunities quarterly
- Calculate tax benefit vs. transaction costs
- Prepare Form 8949 reporting
- Audit defense if IRS examines
CLIENT ACKNOWLEDGMENT:
I understand this strategy is legal under current law but may change in future. I will not trade excessively or abuse the strategy. I will follow CPA recommendations and maintain proper documentation.
Client Signature: _________________ Date: _________
Result: Clients understand parameters and don’t go rogue with excessive trading.
The Quarterly Harvesting Review Process
Here’s my systematic process:
Step 1: Quarterly Portfolio Review (January, April, July, October)
I prepare report showing:
- Current holdings
- Cost basis (by tax lot)
- Current market value
- Unrealized gains/losses
- Potential tax benefit from harvesting
Sample report:
CLIENT: John Doe
QUARTER ENDING: September 30, 2025
TAX LOSS HARVESTING OPPORTUNITIES:
Position #1: Ethereum
- Holdings: 12.5 ETH
- Cost basis: $3,650/ETH = $45,625
- Current price: $3,150
- Unrealized loss: ($6,250)
- Potential tax benefit: $1,738 (27.8% bracket)
- Transaction cost: ~$315 (0.5% round-trip)
- NET BENEFIT: $1,423
Position #2: Solana
- Holdings: 80 SOL
- Cost basis: $138/SOL = $11,040
- Current price: $125
- Unrealized loss: ($1,040)
- Potential tax benefit: $289
- Transaction cost: ~$110
- NET BENEFIT: $179
RECOMMENDATION:
✓ HARVEST: Ethereum (strong net benefit $1,423)
✗ HOLD: Solana (marginal benefit $179, not worth transaction costs)
TOTAL ESTIMATED TAX SAVINGS THIS QUARTER: $1,423
YTD TAX SAVINGS: $4,250
Step 2: Client Approval
I send report with specific recommendation:
“I recommend selling 12.5 ETH to harvest $6,250 loss (tax benefit $1,738, cost $315, net $1,423). After sale, we will repurchase 12.5 ETH within 48 hours to maintain exposure. Please approve by replying YES or NO.”
Client responds: “YES”
Step 3: Execute Trades
Day 1 (Friday 3:00 PM):
- Sell 12.5 ETH @ $3,150 = $39,375 proceeds
- Realize $6,250 loss
- Proceeds held in USD/USDC
Day 2 (Monday 9:00 AM):
- Review ETH price (may have changed over weekend)
- ETH now $3,180 (rose 0.95% over weekend)
- Rebuy 12.38 ETH @ $3,180 = $39,368
- Result: Harvested $6,250 loss, but own 0.12 ETH less (opportunity cost)
Communication to client:
“Tax loss harvesting complete. Realized $6,250 loss (tax savings $1,738). Repurchased ETH at $3,180 (+0.95% from sale price). Due to price increase, we own 12.38 ETH (0.12 ETH less than before). Net benefit after costs: $1,408.”
Step 4: Update Records
Beancount entries:
2025-10-15 * "Tax Loss Harvest - Sell ETH" #tlh-q4-2025
Assets:Crypto:ETH -12.5 ETH @ 3650.00 USD
Assets:Checking 39375.00 USD
Expenses:Fees:Exchange 196.88 USD
Income:CapitalGains:LTLoss 6250.00 USD
2025-10-17 * "Tax Loss Harvest - Rebuy ETH" #tlh-q4-2025
Assets:Crypto:ETH 12.38 ETH @ 3180.00 USD
Assets:Checking -39368.40 USD
Expenses:Fees:Exchange 196.84 USD
Update client dashboard:
- New ETH cost basis: $3,196.78/ETH (includes fees)
- YTD harvested losses: $18,750
- YTD tax savings: $5,213
- Transaction costs: $1,250
- Net benefit: $3,963
The “Wash Trading” Red Flag
I have strict rules to avoid appearing like wash trading (illegal market manipulation):
What I NEVER do:
- Same-day sale and rebuy (looks like wash trading)
- Round-trip trades multiple times per day
- Identical quantities (e.g., always exactly 1.000 BTC)
- Trades at exact same price
What I ALWAYS do:
- Wait 24-72 hours between sale and repurchase
- Vary quantities slightly (sell 12.5 ETH, rebuy 12.38 ETH)
- Allow prices to float naturally (don’t use limit orders at exact sale price)
- Document investment purpose (not just tax avoidance)
Why this matters:
Market manipulation laws prohibit “wash trading” (buying and selling to create false volume).
While tax loss harvesting is NOT wash trading (different purpose), the pattern could raise red flags with:
- Exchange compliance departments
- SEC (if crypto becomes securities)
- IRS (if appears abusive)
My rule: Make trades look like legitimate investment decisions, not automated tax gaming.
The Form 8949 Reporting Burden
Fred mentioned Form 8949. Let me show the client communication challenge:
Client with 50 tax loss harvesting transactions:
- 50 sales = 50 lines on Form 8949
- Each line requires: Description, dates, proceeds, basis, gain/loss
- Many tax software programs struggle with this volume
My process:
Step 1: Export transaction data to CSV
Date Sold, Description, Date Acquired, Proceeds, Cost Basis, Gain/Loss
10/15/2025, "12.5 Ethereum", 03/20/2024, $39,178.12, $45,625.00, ($6,446.88)
11/20/2025, "1.2 Bitcoin", 05/15/2024, $74,280.00, $79,200.00, ($4,920.00)
...
Step 2: Import to tax software
- TurboTax: Import via CSV
- Proseries: Manual entry or import
- Drake: CSV import
Step 3: Generate Form 8949
- Software creates complete Form 8949
- May require multiple pages (14 transactions per page)
- Client reviews and approves
Client reaction:
“Wow, this is a lot of transactions! Is this going to trigger an audit?”
My response:
“No. High transaction volume is normal for active crypto investors. IRS expects this. We have complete documentation for every transaction.”
The Estimated Tax Payment Adjustment
Important: Tax loss harvesting affects quarterly estimated tax payments.
Example:
Q3 estimated tax (paid 9/15/2025):
- Based on YTD income through August
- Estimated annual tax: $45,000
- Q3 payment: $11,250
Q4 development (October-December):
- Harvest $25,000 in crypto losses
- Offset $20,000 in capital gains
- Deduct $5,000 against ordinary income (but $3K limit, so $3,000 deductible, $2,000 carryforward)
Revised annual tax:
- Original estimate: $45,000
- Tax savings from harvesting: ($6,390) ([$20,000 × 27.8%] + [$3,000 × 27.8%])
- Revised estimate: $38,610
Q4 estimated payment (due 1/15/2026):
- Should be: $9,652 (not $11,250)
- Client can reduce Q4 payment by $1,598
Client communication:
“Due to tax loss harvesting in Q4, your estimated tax payment is reduced from $11,250 to $9,652. You can pay $1,598 less in January.”
Client is happy.
The Multi-Year Loss Carryforward Tracking
When clients have large carryforward losses, tracking becomes critical.
Client example:
- 2023: Harvested $40,000 loss, gains $15,000, excess $25,000 carryforward
- 2024: Harvested $18,000 loss, gains $8,000, used $8,000 + $3,000, excess $32,000 carryforward
- 2025: No harvesting, gains $50,000, use $32,000 carryforward, taxable gains $18,000
Without proper tracking: Client might forget carryforward and pay tax on full $50,000 (overpay $8,896).
My tracking system:
Spreadsheet: Capital Loss Carryforward Register
| Year | Losses Harvested | Gains Offset | Ordinary Income Offset | Remaining Carryforward |
|---|---|---|---|---|
| 2023 | $40,000 | $15,000 | $3,000 | $22,000 |
| 2024 | $18,000 | $8,000 | $3,000 | $29,000 |
| 2025 | $0 | $29,000 | $0 | $0 |
Updated annually in client tax file.
IRS Form 1040, Schedule D, Line 14: “Capital loss carryover from prior year: $29,000”
Questions for Tina and Fred
Tina: You mentioned IRC § 1211(b) $3,000 limit. Can client deduct $3,000 against ordinary income PLUS offset unlimited capital gains in same year? Or is it $3,000 total?
Answer (for others): Client can offset UNLIMITED capital gains + $3,000 ordinary income in same year. The $3,000 limit only applies to excess losses beyond gains.
Fred: Your ROI model assumes 27.8% tax rate. How sensitive is the benefit to tax bracket? For client in 12% bracket, is it still worth it?
For everyone: Anyone had clients who over-harvested losses (created $100K+ carryforwards they’ll never use)? How do you prevent this?
My Bottom Line
Tax loss harvesting is valuable, but requires:
- Client education: Written advisory explaining strategy
- Systematic process: Quarterly reviews, not ad-hoc trading
- Proper documentation: Form 8949 reporting, audit trail
- Reasonable frequency: 2-4 times/year, not daily
- Professional judgment: Only harvest when benefit exceeds costs
My standard fees:
- Quarterly harvesting review: Included in annual tax prep fee
- Transaction execution: $100/quarter
- Form 8949 preparation: $25/transaction
- Multi-year carryforward tracking: $150/year
Clients who follow my systematic approach: 5-10% portfolio boost from tax alpha, no IRS issues.
Clients who go rogue (excessive trading): I fire them. Not worth the professional liability risk.
Alice Thompson, CPA
Thompson & Associates
P.S. - I’ve created “Tax Loss Harvesting Client Advisory Template” and “Quarterly Harvest Opportunity Report” (Excel + Beancount queries). If interest, happy to share.