Bitcoin price declines can provide an opportunity to reduce your taxes under the right circumstances. Tax loss harvesting (TLH) is a strategy where you sell bitcoin to realize losses for tax purposes. This article explains how tax loss harvesting works, when to consider this strategy, and important things to keep in mind.
Before we dive in, it is important to note that River is not a tax advisor, and this article is not intended as tax advice. Our goal is to help you understand the basics of navigating bitcoin tax loss harvesting, so you can make informed decisions. This article is for informational purposes only. For personalized advice, please consult a tax professional.
River clients can get personalized help with executing a tax loss harvesting strategy. Visit our Private Client page or reach out to learn more.
What is Tax Loss Harvesting?
If you own bitcoin that you bought at a higher price than today, you can use this to lower your tax bill by realizing these losses. This is known as tax loss harvesting, and is often paired with buying bitcoin back immediately after selling to maintain your same amount of exposure. Tax loss harvesting can provide tax benefits by:
- Offsetting capital gains you realized elsewhere, and
- Potentially reduce your taxable income (up to certain limits)
How Does Tax Loss Harvesting Work with Bitcoin?
As of the 2026 tax year, bitcoin is regulated as a commodity. When you sell bitcoin, you realize a capital gain or capital loss based on your cost basis and holding period, similar to stocks and bonds.
Because bitcoin is not currently treated as a stock or security under IRS guidance, the wash sale rule does not apply. That means you can sell bitcoin at a loss and immediately repurchase it without waiting 30 days. This could change if IRS guidance or legislation evolves, so always verify current rules.
Here’s what the process typically looks like in practice:
- Step 1: Review the unrealized gains or losses of your bitcoin holdings. You also may want to consider whether the loss is short-term or long-term, and whether you have realized gains elsewhere this year that can be offset with losses.
- Step 2: Sell bitcoin to realize a loss. The amount of bitcoin you choose to sell and your cost basis will determine how much loss you realize.
- Step 3 (optional): Immediately repurchase your bitcoin to maintain exposure.
The result is that you’ve captured a tax benefit without meaningfully changing your long-term position.
What Are the Benefits of Tax Loss Harvesting?
Let’s consider the following example.
Suppose you bought 1 bitcoin for $100,000. Today, the bitcoin price is $50,000. By selling your bitcoin and buying it back right away, you now have a $50,000 of realized loss, which can provide two benefits:
- Offsetting capital gains: Capital losses generally offset capital gains dollar-for-dollar. This can be especially useful if you have realized gains from bitcoin sold in the same tax year at a profit, stocks/ETFs in a brokerage account, or other taxable investments.
- Reduce ordinary income: If your capital losses exceed your capital gains for the year, you can generally deduct the excess loss against ordinary income up to $3,000 per year. Any remaining unused net capital loss can be carried forward to future years indefinitely. This carry-forward feature is why TLH can keep paying off over multiple tax years.
Important Considerations of Tax Loss Harvesting
The most important thing to consider with tax loss harvesting is your cost basis method.
Your realized gain or loss depends on which bitcoin you are treated as selling. Because bitcoin is typically acquired over time at different prices, each purchase creates a separate “tax lot.” The method you use determines which lot is sold first.
- FIFO (first-in, first-out): Bitcoin acquired first will be sold first.
- HIFO (highest-in, first-out): Bitcoin with the highest cost basis will be sold first.
- LIFO (last-in, first-out): Bitcoin acquired last will be sold first.
Investors may use specific identification to select tax lots at the time of sale. If they do not adequately identify the bitcoin sold, FIFO is generally treated as the default. Some exchanges, such as River, also allow investors to set a standing cost basis method (LIFO or HIFO) as their default ahead of time. However, this must be configured through the platform in advance and supported by proper recordkeeping.
Because TLH outcomes can change dramatically depending on lot selection, your record-keeping and method matter a lot.
In addition to cost basis, here are a few important things to keep in mind:
- Rule changes: The wash sale rule could one day apply to bitcoin via future legislation or IRS guidance, so strategies should be revisited each year.
- Execution risk and slippage: Selling and rebuying can create trading fees, spreads, and price movement risk, even if you rebuy immediately.
- Recordkeeping complexity: You need a reliable transaction history, tax lot tracking, and accurate cost basis records.
- Tax outcome mismatch: TLH reduces taxes now, but if you sold bitcoin and it later recovers after you repurchased, you may realize larger gains because you now have a new (possibly lower) basis.
When to Consider Tax Loss Harvesting
Tax loss harvesting tends to be most considered when bitcoin is meaningfully below prior purchase prices. However, just because you have the opportunity to realize losses does not mean it is always a good choice:
- If you have multiple BTC lots at different prices, TLH can look very different depending on what you are selling. Under FIFO, you are more likely to be selling older, lower cost basis bitcoin that may not create a loss.
- TLH is most immediately valuable when you have realized capital gains this year. If not, the benefit may be limited to the $3,000 ordinary income offset, with the remainder carried forward.
- The benefits of TLH can depend on your expectations for future realized gains, your future income tax rate, and future rebalancing of other investments.
In summary, tax loss harvesting can reduce taxes during bitcoin drawdowns, but the value depends on your cost basis method, fees, and good records. Make sure you weigh the benefit against complexity and possible rule changes before taking any action.
Notice: River does not provide investment, financial, tax, or legal advice. The information provided is general and illustrative in nature and therefore is not intended to provide, and should not be relied on for, tax advice. We encourage you to consult the appropriate tax professional to understand your personal tax circumstances.