How crypto losses work
The IRS treats cryptocurrency as property, not currency. This means crypto transactions follow capital gains/losses rules:
- Short-term losses (held ≤ 1 year) offset short-term gains first
- Long-term losses (held > 1 year) offset long-term gains first
- Net losses offset the other type of gain
- Remaining net loss: deduct up to $3,000/year against ordinary income
- Anything left carries forward to next year — forever
Tax-loss harvesting with crypto
Unlike stocks, cryptocurrency is not subject to the wash sale rule (as of 2026). This means you can sell crypto at a loss, immediately buy it back, and still claim the loss. This is called tax-loss harvesting.
Note: Congress has proposed extending wash sale rules to crypto, so this may change. For now, it's a legitimate strategy to reduce your tax bill.
What triggers a taxable event?
- Selling crypto for USD or other fiat
- Trading one crypto for another (BTC → ETH)
- Using crypto to buy goods or services
- Receiving crypto as payment (taxed as income at fair market value)
Not taxable: Buying crypto with USD, transferring between your own wallets, holding (HODLing)
In 2025, you had:
- $5,000 gain from selling Bitcoin
- $12,000 loss from selling Ethereum
Net loss: $12,000 - $5,000 = $7,000 net capital loss
You deduct $3,000 against ordinary income on your 2025 return. The remaining $4,000 carries forward to 2026.
See IRS Notice 2014-21 and the IRS FAQ on Virtual Currency. Report on Form 8949 and Schedule D. The $3,000 capital loss limit is in IRC Section 1211(b).
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