Tax loss harvesting is the strategic practice of selling cryptocurrency assets at a loss to offset capital gains and reduce your tax liability. In the United States, crypto losses can offset unlimited capital gains plus up to $3,000 of ordinary income annually, with excess losses carried forward to future years. Unlike stocks, cryptocurrency currently isn't subject to the wash sale rule, allowing you to sell at a loss and immediately repurchase the same asset. Smart investors harvest losses in December before year-end to optimize their tax situation.
Example:
You made $50,000 profit trading Bitcoin but lost $20,000 on an altcoin investment this year. By selling the altcoin before December 31st, you harvest the $20,000 loss to offset your Bitcoin gains, reducing your taxable income to $30,000. At a 25% combined tax rate, this saves you $5,000 in taxes ($20,000 × 25%). You can immediately repurchase the altcoin if you still believe in it, since crypto isn't subject to the 30-day wash sale rule that applies to stocks.