How can losses on crypto help to lower your tax bill? Tax-loss harvesting is one of the most powerful strategies to lower your tax bill using underwater crypto. When the market drops, like the significant selloff seen in October 2026, many investors find themselves holding cryptocurrency worth less than what they originally paid for it. If you simply hold those assets, those "paper losses" do nothing for your taxes. You do not realize a loss until you dispose of your crypto through selling, exchanging crypto or using it to make a purchase or payment. When you sell the depreciated crypto before December 31, 2026, you turn that paper loss into a "realized capital loss," which actively reduces your tax liability in three steps: 1. Offsetting Capital Gains: Your realized crypto losses first offset any capital gains you made during the year (whether from other crypto, stocks, or real estate) dollar-for-dollar. If you made a $10,000 profit selling Bitcoin earlier this year, but take a $10,000 loss selling Ethereum today, you effectively wipe out the taxes owed on that Bitcoin gain. 2. Offsetting Ordinary Income: If your total capital losses exceed your capital gains for the year, you can use the remaining loss to offset up to $3,000 of your ordinary income (like your W-2 salary or business income). For a single filer in the 22% tax bracket, a $3,000 deduction saves roughly $660 in actual taxes. 3. Carrying Losses Forward: If you still have realized losses left over after maxing out the $3,000 ordinary income deduction, the remainder doesn't expire. It carries forward indefinitely to future tax years, waiting to offset future gains. If you are filing MFS, then your capital losses are limited to $1,500. Currently, the IRS classifies cryptocurrency as property, meaning the dreaded "wash-sale rule" (which applies to stocks and securities) does not apply to directly held digital assets like Bitcoin or Ethereum. This means you can sell your underwater crypto to lock in the tax deduction and immediately buy back the exact same asset to maintain your market position. Congress is actively moving to close this loophole. The House Ways and Means Committee advanced legislation (H.R. 10357) in September 2026 that would apply the 30-day wash-sale rule to digital assets. If enacted, selling and immediately rebuying would disallow the tax deduction, making it critical to execute these trades before any new rules take effect. If you hold Spot Bitcoin ETFs rather than direct cryptocurrency, the wash-sale rule already applies, because ETFs are classified as securities. You must wait more than 30 days before buying the ETF back to claim the loss.