Tax Loss Harvesting

About Tax Loss Harvesting

Tax loss harvesting is the practice of selling investments at a loss to offset capital gains and reduce taxes. Under current US rules, up to 3,000 of capital losses can offset ordinary income each year, with unused losses carried forward. Tax loss harvesting creates perverse incentives. Investors may sell losing positions primarily for the tax benefit. In crypto markets, the wash sale rule does not apply, allowing investors to sell and immediately repurchase crypto at the same price to harvest losses. This has created a mini industry of crypto tax loss harvesting. Critics argue tax loss harvesting distorts markets, particularly at year end when investors sell losing positions. Proponents argue it is a legitimate tax planning strategy that the rules explicitly allow.