Tax-Loss Harvesting

When to use this skill

Use when the user asks about:

• Reducing crypto tax obligations
• Finding unrealized losses in their portfolio
• Tax-loss harvesting strategies for crypto
• Wash sale rules and crypto (jurisdiction-dependent)
• Year-end tax planning for crypto holdings

Harvesting Framework

1. Identify Loss Positions

Scan the portfolio for unrealized losses:

• List all holdings with cost basis and current market value
• Calculate unrealized P&L for each position (current value - cost basis)
• Categorize by holding period: Short-term (held < 1 year) vs long-term (held > 1 year)
• Sort by loss magnitude: Largest absolute losses first

Asset	Cost Basis	Current Value	Unrealized P&L	Holding Period
Token A	$10,000	$6,000	-$4,000	8 months (ST)
Token B	$5,000	$3,500	-$1,500	14 months (LT)

2. Tax Impact Calculation

Estimate the value of harvesting each loss:

• Short-term losses offset short-term gains (taxed at ordinary income rate, up to 37% in the US)
• Long-term losses offset long-term gains (taxed at 0/15/20% depending on bracket)
• Net losses can offset up to $3,000 of ordinary income per year (US), remainder carries forward
• Calculate tax savings: Loss amount * marginal tax rate = estimated tax reduction
• Prioritize short-term losses harvested against short-term gains for maximum benefit

3. Wash Sale Considerations

Address wash sale rules (jurisdiction-dependent):

• US crypto status: As of the user's tax year, check current IRS guidance on wash sale applicability to crypto. The 2025 infrastructure bill may have changed rules.
• Traditional wash sale rule (stocks): Cannot buy back substantially identical asset within 30 days before or after the sale
• If crypto wash sales apply: Suggest waiting 31 days or swapping into a correlated but different asset
• If wash sales do NOT apply: Can sell and immediately rebuy (preserving exposure while capturing the loss)
• Other jurisdictions: Rules vary significantly — UK (30-day rule), EU, Australia, etc. Always advise consulting a local tax professional

4. Replacement Strategy

When maintaining market exposure after harvesting:

• Same asset rebuy (if wash sale doesn't apply): Sell and immediately repurchase — cost basis resets to current price
• Correlated substitute: Replace with a similar but distinct asset (e.g., sell one L1 token, buy another L1 token with similar beta)
• Index/basket approach: Replace individual position with a broader category exposure
• DeFi alternative: Move to a yield-generating position in a similar sector
• Wait period: If wash sale applies, set a calendar reminder to rebuy after the waiting period

5. Execution Plan

Step-by-step execution:

1. Calculate total realized gains for the year so far
2. Identify losses that offset those gains (match short-term with short-term first)
3. Determine optimal harvest amount (no need to harvest more losses than you have gains + $3K)
4. Execute the sell orders
5. Immediately execute replacement buys (if wash sale allows)
6. Record the transactions with precise timestamps and prices for tax reporting
7. Update cost basis records

6. Record Keeping

Document for tax filing:

• Date and time of each sell transaction
• Exact proceeds received
• Original cost basis and acquisition date
• Net gain or loss
• Replacement purchase details (date, price, quantity)
• Running total of harvested losses for the tax year

7. Output Format

• Total unrealized losses available: Dollar amount
• Recommended harvest amount: Based on gains to offset
• Estimated tax savings: Dollar amount at user's tax bracket
• Positions to harvest: Ordered list with amounts
• Replacement strategy: For each harvested position
• Wash sale risk: Whether this applies in user's jurisdiction
• Action items: Step-by-step execution plan with timing
• Disclaimer: This is educational guidance, not tax advice. Consult a qualified tax professional for your specific situation.