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There are headlines floating around about enforcing wash sale rules for crypto capital gains and losses, this prompted me to look into tax loss-harvesting, and it turns out I don't understand it at all.

This article provides an example scenario of how loss-harvesting works with crypto transactions. To summarize:

  • Lucky purchases crypto at $50k
  • As it drops in value, sells and repurchases it several times
  • He finally repurchases it at $15k, with a capital loss of 35k on the books
  • The crypto asset then rises to 55k
  • He sells at 55k
  • At this point in time, he has:
    • Capital Losses: 35k
    • Basis: 15k

That gives him a net profit of 40k, and deducting 35k losses, he pays capital gains tax on 5k

Now if he didn't bother with the whole selling and repurchasing song and dance, his basis was 50k and he nets 5k at sale and still pays capital gains taxes on 5k.

How did Lucky benefit from loss-harvesting?

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  • What country's tax rules are you asking about? Please add a corresponding country tag. Sep 14 at 21:38
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How did Lucky benefit from loss-harvesting?

Luck did not "benefit" because all of the transactions happened in the same tax year.

Here's how Lucky could have benefited:

  • Lucky purchases crypto at $50k
  • The crypto drops in value to $15k.
  • Lucky has other investments that gained $35k in value
  • Lucks sells the crypto for $15k and (after 30 days) repurchases it at $15k

Lucky now has net zero capital gains (ignoring short vs long term) and has crypto with a basis of $15k. Lucky won't pay the tax on the gain of the crypto until it is sold for a profit.

In the next tax year:

  • The crypto asset then rises to 55k
  • He sells at 55k

Now Lucky will have to pay tax on $40k of capital gains.

In short, tax loss harvesting is used to offset gains on other investments. In this scenario, the $35k gain on the other investments was deferred until the crypto was sold.

Also note that you have to be careful of wash sale rules with tax loss harvesting. That's why I added the "after 30 days" qualifier. You can't sell and re-buy the same thing just to harvest the tax loss. You have to wait 30 days. (The actual rules are more complicated but that's the basic idea)

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    Thank you, multi-year and deferred makes sense. As an aside, internet wisdom says wash sale rules do not apply to crypto - the news article I linked in my question is congress attempting to apply wash sale rules to crypto
    – RaGe
    Sep 14 at 14:17
  • IRS "wisdom" trumps internet wisdom :) If they don't apply now they will soon...
    – D Stanley
    Sep 14 at 14:19

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