Crypto Wash Sale Loophole: Use It Before Congress Closes It (LA Tech Week)

[tax_tina]

At LA Tech Week 2025, every tax attorney and CPA I spoke with emphasized the same message: The crypto wash sale loophole won’t last forever. Use it strategically while you can.

This is one of the most powerful tax planning tools available for cryptocurrency investors, but it’s living on borrowed time.

What Are Wash Sale Rules?

For those less familiar:

IRC § 1091: Wash Sale Rules (For Securities)

If you sell a security at a loss and buy “substantially identical” security within 30 days (before or after the sale), you CANNOT deduct the loss immediately.

The 30-day window:

• 30 days BEFORE the sale
• Day of sale
• 30 days AFTER the sale
• Total: 61-day period

Example with stocks:

• October 1: Buy 100 shares AAPL @ $180 = $18,000
• December 1: AAPL drops to $150, sell 100 shares = $15,000 (loss of $3,000)
• December 15: Rebuy 100 shares AAPL @ $152 = $15,200
• Wash sale! Loss of $3,000 is disallowed
• Loss is added to basis of new shares (deferred, not lost forever)

Why it exists: Prevent tax manipulation - selling at loss purely for tax benefit while maintaining same economic position.

The Crypto Exception: Wash Sale Rules DON’T Apply

Here’s the critical difference:

IRC § 1091 applies only to “securities” and “stock”

IRS Notice 2014-21: Virtual currency (cryptocurrency) is property, not a security.

Result: Wash sale rules DO NOT apply to crypto.

Example with Bitcoin:

• October 1: Buy 1 BTC @ $68,000
• December 1: BTC drops to $62,000, sell 1 BTC (loss of $6,000)
• December 2: Rebuy 1 BTC @ $62,100
• NOT a wash sale! $6,000 loss is fully deductible

You can sell crypto at a loss and immediately repurchase the same crypto WITHOUT waiting 30 days.

Why This Matters: Tax Loss Harvesting

Tax loss harvesting: Intentionally selling assets at a loss to offset gains.

For stocks: Limited by wash sale rules (must wait 30+ days or buy different stock)

For crypto: NO restrictions (can immediately rebuy same crypto)

The tax benefit:

Scenario: Portfolio with gains and losses

Realized gains in 2025:

• Sold NVIDIA stock: $40,000 gain (long-term)
• Sold rental property: $25,000 gain (long-term)
• Total gains: $65,000

Unrealized crypto losses:

• Bitcoin: Bought @ $68,000, now $62,000 (unrealized loss $6,000)
• Ethereum: Bought @ $3,800, now $3,200 (unrealized loss $600)
• Solana: Bought @ $145, now $125 (unrealized loss $200)
• Total unrealized losses: $6,800

Tax loss harvesting strategy (December 2025):

1. Sell all 3 cryptos (realize $6,800 loss)
2. Immediately rebuy all 3 cryptos (same day)
3. Offset $6,800 of capital gains
4. Still own same crypto (same economic position)

Tax savings:

• Long-term capital gains rate: 15%
• Tax saved: $6,800 × 15% = $1,020

Cost: Exchange fees (~0.5%) = $34

Net benefit: $986 (free money from tax code)

Year-End Tax Loss Harvesting: The December Rush

Every December, crypto markets see “tax loss harvesting” selling pressure.

The pattern:

• Mid-December: Investors sell losing positions
• Creates downward price pressure
• Investors rebuy immediately (or within days)
• Price recovers

Sophisticated strategy:

• Sell on December 15 (when others are selling, price lowest)
• Rebuy on December 28 (when selling pressure eases, before year-end)
• Capture loss AND potentially rebuy at better price

Real example from my client (December 2024):

• Held 10 ETH bought @ $3,800 = $38,000 cost basis
• ETH price December 15: $3,100
• Sold 10 ETH = $31,000 (realized loss $7,000)
• ETH price December 28: $3,050 (dropped further during tax selling)
• Rebought 10.16 ETH @ $3,050 = $31,000
• Result: $7,000 tax loss PLUS extra 0.16 ETH (bonus)

Tax savings: $7,000 × 24% = $1,680

Extra ETH value: 0.16 ETH × $3,050 = $488

Total benefit: $2,168

Advanced Strategy: Loss Harvesting + Stablecoin Parking

Some investors don’t immediately rebuy - they “park” in stablecoins temporarily.

Strategy:

1. Sell BTC at loss (realize loss for taxes)
2. Convert to USDC (stablecoin, maintains USD value)
3. Wait for price drop or favorable entry point
4. Rebuy BTC from USDC

Benefit:

• Realize tax loss immediately
• Preserve capital in stable asset
• Rebuy crypto at optimal price (not forced to rebuy immediately)

Risk:

• Crypto price might recover before you rebuy
• You’d miss the upside (sitting in stablecoins)

Example:

• Sell 5 BTC @ $62,000 (cost basis $68,000, loss $30,000)
• Convert to 310,000 USDC
• Wait 2 weeks
• BTC drops to $60,000
• Rebuy 5.17 BTC @ $60,000
• Result: Tax loss of $30,000 PLUS extra 0.17 BTC

Tax savings: $30,000 × 24% = $7,200

Extra BTC: 0.17 × $60,000 = $10,200

The $3,000 Annual Deduction Limit

Important limitation:

IRC § 1211(b): Capital Loss Deduction Limit

If capital losses exceed capital gains:

• Can deduct up to $3,000 per year against ordinary income
• Remaining losses carry forward indefinitely

Example:

2025 taxes:

• Capital gains: $10,000
• Capital losses (from tax loss harvesting): $25,000
• Net capital loss: ($15,000)

Tax treatment:

• $10,000 loss offsets $10,000 gains = $0 net
• Remaining $15,000 loss:
  • $3,000 deductible against ordinary income (2025)
  • $12,000 carries forward to 2026+

Multi-year planning:

• 2025: Deduct $3,000
• 2026: Deduct $3,000 (if no gains)
• 2027: Deduct $3,000
• 2028: Deduct $3,000
• 2029: Deduct $3,000 (if no gains)

Takes 5 years to fully utilize $15,000 loss.

Optimal strategy: Harvest losses to offset gains, avoid excess losses beyond what you can use.

When Congress Will Close the Loophole

Current legislative proposals:

S. 1068: Cryptocurrency Tax Fairness Act

• Would extend wash sale rules to digital assets
• Introduced 2023, reintroduced 2025
• Status: Pending in Senate Finance Committee

Infrastructure Investment and Jobs Act (2021)

• Included crypto broker reporting (Form 1099-DA)
• Did NOT include wash sale rule extension (removed from final bill)

Biden Administration Proposals (2024-2025)

• Treasury Department supports wash sale rule extension
• Included in Biden budget proposals
• Estimated revenue: $24 billion over 10 years

Timeline prediction:

• Likely passes within 2-3 years (2026-2028)
• Could be effective immediately (no grandfather period)
• Or effective for tax years after enactment

My prediction: Wash sale rules will apply to crypto by 2027.

How to Prepare for Future Wash Sale Rules

If wash sale rules extended to crypto:

Scenario 1: Immediate effective date (no transition)

• Sell crypto at loss on day before effective date
• Realize all losses immediately
• Rebuy next day (after rules take effect)
• Losses already realized (grandfathered)

Scenario 2: Effective for future tax years

• 2026 legislation effective for 2027 tax year
• Harvest all losses in 2026 (last year without wash sale rules)
• 2027 onwards: Crypto treated like stocks (30-day waiting period)

Strategy: Maximize tax loss harvesting in 2025-2026 while loophole still exists.

The Economic Substance Doctrine Risk

Warning: Even though wash sale rules don’t apply to crypto, IRS can still challenge under economic substance doctrine.

Economic substance doctrine:
Transaction must have substantial purpose OTHER than tax avoidance to be respected.

Aggressive abuse that could trigger IRS challenge:

Example:

• Sell 100 BTC at 9:00 AM (realize $500,000 loss)
• Rebuy 100 BTC at 9:01 AM (same price)
• Repeat daily for 30 days
• Claim $15 million in losses (from $500K position)

IRS argument:
“These transactions have no economic substance. Sole purpose is tax avoidance. We’re disallowing the losses.”

Court precedent:

• Gregory v. Helvering (1935): Established economic substance doctrine
• Frank Lyon Co. v. United States (1978): Refined doctrine

How to stay safe:

1. Don’t trade excessively just for tax losses

   • Harvesting losses 2-4 times per year: Reasonable
   • Daily wash trading for tax losses: Abusive

2. Have economic reasons for transactions

   • “I sold to realize losses and rebalance portfolio”
   • NOT: “I sold purely to create tax losses with no other purpose”

3. Don’t immediately rebuy at exact same price

   • Wait hours or days before repurchasing
   • Shows you’re making actual investment decisions, not gaming system

4. Document investment strategy

   • Written investment policy
   • Portfolio rebalancing schedule
   • Risk management guidelines

Beancount Tracking for Tax Loss Harvesting

Here’s how I track tax loss harvesting in client ledgers:

Sale to realize loss:

2025-12-15 * "Tax Loss Harvesting - Sell BTC" #tax-planning ^tlh-2025-btc
  btc_sold: 1.5
  cost_basis_per_btc: 68000.00
  total_cost_basis: 102000.00
  sale_price_per_btc: 62000.00
  gross_proceeds: 93000.00
  exchange_fee: 465.00  ; 0.5%
  net_proceeds: 92535.00
  capital_loss: 9465.00
  tax_lot: "2024-03-15 purchase"
  holding_period: "long_term"
  Assets:Crypto:BTC              -1.5 BTC @ 68000.00 USD
  Assets:Checking                92535.00 USD
  Expenses:Fees:Exchange           465.00 USD
  Income:CapitalGains:LongTerm   9465.00 USD  ; Loss = positive expense

Repurchase same day:

2025-12-15 * "Tax Loss Harvesting - Rebuy BTC" #tax-planning ^tlh-2025-btc-rebuy
  btc_bought: 1.492
  purchase_price_per_btc: 62050.00
  total_cost: 92586.60
  exchange_fee: 462.93
  total_paid: 93049.53
  new_cost_basis: 62357.80  ; Includes fees
  note: "Repurchased after tax loss harvesting, new cost basis higher due to fees"
  Assets:Crypto:BTC              1.492 BTC @ 62357.80 USD
  Assets:Checking              -93049.53 USD

Year-end reconciliation:

2025-12-31 * "Tax Loss Harvesting Summary - 2025" #tax-summary
  total_losses_harvested: 42500.00
  total_gains_offset: 38000.00
  excess_loss: 4500.00
  current_year_deduction: 3000.00  ; IRC § 1211(b) limit
  carryforward_to_2026: 1500.00
  tax_saved_estimated: 10260.00  ; (38000 × 24%) + (3000 × 24%)
  exchange_fees_paid: 1912.00
  net_tax_benefit: 8348.00

Beancount query for tax loss opportunities:

SELECT
  commodity,
  cost_basis,
  current_market_value,
  unrealized_loss,
  holding_period
WHERE unrealized_loss < 0
  AND holding_period > 365  ; Long-term losses more valuable
ORDER BY unrealized_loss ASC

This query identifies best candidates for tax loss harvesting.

The Form 8949 Reporting Requirement

Even though wash sale rules don’t apply, you MUST report all transactions on Form 8949.

Form 8949: Sales and Dispositions of Capital Assets

For each crypto sale:

• Column (a): Description (e.g., “1.5 Bitcoin”)
• Column (b): Date acquired
• Column (c): Date sold
• Column (d): Proceeds
• Column (e): Cost basis
• Column (h): Gain or loss

If 100 crypto transactions: 100 lines on Form 8949.

Reporting tax loss harvesting:

Description: “1.5 Bitcoin - Tax Loss Harvesting”
Date acquired: 03/15/2024
Date sold: 12/15/2025
Proceeds: $92,535
Cost basis: $102,000
Gain/loss: ($9,465)

IRS will see:

• Legitimate transaction
• Long-term holding period (9 months)
• Loss is deductible
• No wash sale adjustment needed (crypto exempt)

Questions for the Community

1. How aggressive are you being with tax loss harvesting? Harvesting quarterly, monthly, or only year-end?

2. Do you rebuy immediately or wait? Same day, next day, or week later?

3. Have any clients been challenged by IRS on excessive tax loss harvesting? What was the outcome?

4. Are you preparing for wash sale rules to be extended to crypto? What’s your strategy for the last year before rules change?

5. For Beancount users: How are you tracking tax lots to optimize which positions to harvest?

My Recommendations for 2025

Conservative approach (what I advise most clients):

• Harvest losses 2-4 times per year maximum
• Wait at least 24 hours before repurchasing
• Only harvest losses you can actually use (don’t create $50K loss if you only have $5K gains)
• Document investment rationale for each trade

Aggressive approach (for sophisticated clients):

• Harvest losses as opportunities arise (monthly monitoring)
• Rebuy same day (legal under current law)
• Harvest all available losses in December 2025 and 2026 (anticipating law change)
• Maintain detailed documentation of strategy

Prepare for law change:

• Assume wash sale rules extended by 2027
• Maximize harvesting in 2025-2026
• Build carryforward loss reserves while you can
• Have plan for post-rule-change strategies (30-day swaps, different crypto substitutes)

The Bottom Line

The crypto wash sale loophole is:

• Legal: Current law does not apply wash sale rules to crypto
• Powerful: Can save thousands in taxes annually
• Limited time: Congress likely to close loophole within 2-3 years
• Strategic: Use it intelligently, not abusively

My advice: Take advantage of this tax planning opportunity while it exists, but be prepared for the rules to change.

From LA Tech Week: Every tax professional I spoke with is advising clients to maximize tax loss harvesting in 2025-2026. This window won’t last forever.

Tina Chen, EA
Tax Specialist

---

P.S. - I’m creating a “Tax Loss Harvesting Opportunity Tracker” (Beancount query-based) and “Form 8949 Automation Guide” for crypto traders. If interest, will share with community.

Key Sources:

• LA Tech Week 2025 (October 13-19)
• IRC § 1091 (Wash Sale Rules)
• IRC § 1211 (Capital Loss Limitations)
• IRS Notice 2014-21 (Virtual Currency Guidance)
• S. 1068 (Cryptocurrency Tax Fairness Act)
• Treasury Department Budget Proposals (2024-2025)

[finance_fred]

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:

1. Harvest crypto loss (sell at low price)
2. Instead of rebuy, lend stablecoins on DeFi protocol
3. Earn yield (5-8%) while waiting for re-entry point
4. 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:

1. Build Beancount query to identify opportunities
2. Harvest losses quarterly (not daily - avoid abuse appearance)
3. Rebuy within 24-72 hours (shows investment decision, not pure tax gaming)
4. Document investment rationale
5. 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.

[accountant_alice]

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.