Crypto Tax Loss Harvesting: How to Legally Reduce Your Tax Bill

You made money on some trades. You lost money on others. The obvious question: can you use the losses to reduce the tax you owe on the gains?

Yes. It's called tax loss harvesting, and it's one of the most effective (and completely legal) ways to reduce your crypto tax bill. The basic idea is simple — sell assets that are currently at a loss, lock in that loss for tax purposes, and use it to offset your taxable gains.

The details, however, vary by country. And there's one quirk of crypto that makes this strategy uniquely powerful compared to stocks.

How it works

Let's say you made a £10,000 capital gain selling Bitcoin this year. You also hold Ethereum that's currently worth £3,000 less than what you paid for it.

If you sell the Ethereum now, you realise a £3,000 capital loss. That loss offsets your Bitcoin gain, reducing your taxable gain from £10,000 to £7,000. You pay less tax.

If you still want to hold Ethereum, you can buy it back immediately after selling — which brings us to the most important difference between crypto and traditional investments.

The crypto advantage: no wash sale rule (in most countries)

In the stock market, most countries have a wash sale rule that says you can't sell an investment at a loss and immediately buy back the same thing. If you do, the loss is disallowed.

Here's the twist: in the US, the wash sale rule does not currently apply to cryptocurrency. The IRS classifies crypto as property, not a security, so the existing wash sale restriction under Section 1091 doesn't cover it.

This means you can sell Bitcoin at a loss, buy it back five seconds later, and still claim the full loss on your taxes. It's an incredibly powerful loophole that stock investors don't have access to.

A word of caution: this loophole is well-known, and Congress has attempted to close it multiple times. Proposals to extend wash sale rules to digital assets have appeared in several bills since 2021, though none have passed yet. It could change, so don't assume it will last forever.

Country-by-country rules

🇺🇸 United States

• Capital losses can offset unlimited capital gains for the year
• Up to $3,000 of excess losses can be deducted against ordinary income ($1,500 if married filing separately)
• Any remaining losses carry forward indefinitely to future years
• No wash sale rule for crypto (currently)
• Short-term losses are most valuable because they offset short-term gains, which are taxed at your ordinary income rate (up to 37%)
• Deadline: losses must be realised by December 31 of the tax year

🇬🇧 United Kingdom

• Capital losses offset capital gains in the same tax year
• The annual CGT allowance is now just £3,000 (down from £6,000 in 2023/24 and £12,300 before that)
• CGT rates on crypto: 18% for basic rate taxpayers, 24% for higher rate taxpayers
• Unused losses can be carried forward indefinitely — but you must report them to HMRC within 4 years of the end of the tax year
• HMRC's "same day" and "30-day" rules apply: if you sell and repurchase the same token within 30 days, the loss may be recalculated using the repurchase price. This effectively creates a wash sale restriction
• UK tax year ends 5 April — so there's still time to harvest losses before the 2025/26 year closes

🇨🇦 Canada

• Only 50% of capital gains are taxable (the inclusion rate), so only 50% of losses are deductible
• Losses can offset capital gains but not ordinary income
• Unused losses carry back 3 years or forward indefinitely
• Canada has a Superficial Loss Rule: if you buy back the same asset within 30 days before or after selling at a loss, the loss is denied — this is effectively a wash sale rule
• Filing deadline: April 30 (June 15 if self-employed, but tax is still due April 30)

🇦🇺 Australia

• Capital losses can only offset capital gains — not other income
• Losses carry forward indefinitely (no carry-back)
• If you held the asset for more than 12 months, you'd normally get a 50% CGT discount on gains — but this doesn't apply to losses
• The ATO has explicitly warned against wash sales for the purpose of generating artificial losses, though there's no formal 30-day rule like Canada
• Australia's tax year ends 30 June — harvest before then for the current year
• The ATO's data-matching programme actively collects transaction data from Australian exchanges

When to harvest losses

Year-end is the obvious time — lock in losses before your tax year closes to offset gains made earlier in the year.

But crypto's volatility means there are opportunities throughout the year. If you bought an altcoin at $5 and it's now trading at $1, you don't have to wait until December. Sell it now, lock in the $4 loss, and use it against any gains you've already made or will make this year.

Prioritise short-term losses. In countries like the US where short-term gains are taxed at higher rates (ordinary income), using short-term losses to offset short-term gains saves you the most tax.

The practical challenge

Tax loss harvesting sounds simple in theory. In practice, it requires:

• Accurate cost basis tracking across all your exchanges and wallets
• Knowledge of your unrealised gains and losses at any point in the year
• Understanding of your country's specific rules (wash sale, superficial loss, HMRC 30-day rule)
• Proper documentation — you need to prove when you bought, when you sold, and at what price

If you're trading across multiple platforms, using DeFi protocols, or running trading bots, identifying which assets are in a loss position — and calculating the exact loss — gets complicated quickly.

This is where most people either give up or make mistakes that cost them money. They either miss legitimate losses they could have claimed, or they harvest losses incorrectly and face problems when the tax authority comes asking questions.

A real scenario

Say you have the following 2025 activity:

• Sold BTC for a $12,000 gain
• Sold SOL for a $3,000 gain
• Still holding ETH at a $6,000 unrealised loss
• Still holding AVAX at a $2,000 unrealised loss

Without any action, you owe tax on $15,000 of gains.

If you sell both ETH and AVAX before year-end, you realise $8,000 in losses. Your net taxable gain drops to $7,000. In the US, at a 24% tax rate, that's roughly $1,920 saved in federal tax alone.

In the US (where there's currently no wash sale rule for crypto), you can immediately repurchase ETH and AVAX if you want to keep holding them. Your tax position resets, and you've locked in the loss.

Where HandyTax fits in

We don't just calculate what you owe — we help you understand the full picture, including losses you may not have realised you had.

When we reconcile your portfolio, we provide a clear breakdown of your gains and losses by asset, by holding period, and by jurisdiction. If there are unrealised losses that could offset your gains, we'll flag them.

For clients in multiple countries, we apply the correct rules for each jurisdiction — no guessing about whether the UK 30-day rule or Canada's superficial loss rule affects your position.

Tax season is here. If you want to make sure you're not paying more than you need to — get a quote →