Tax Loss Harvesting

Tax-Loss Harvesting

Identify, score, and plan tax-loss harvesting (TLH) opportunities across a crypto portfolio. This skill covers unrealized-loss ranking, net-benefit calculation, wash sale compliance, annual loss carryforward tracking, and year-end "use it or lose it" strategies.

Disclaimer: This skill provides informational analysis only. It is NOT tax advice. Tax rules vary by jurisdiction and change frequently. Consult a qualified tax professional before making any tax-related trading decisions.

How Tax-Loss Harvesting Works

Tax-loss harvesting is the practice of intentionally realizing investment losses to offset realized capital gains, thereby reducing your current-year tax liability.

Core Mechanism

1. Identify positions with unrealized losses in your portfolio.
2. Sell those positions to realize the loss.
3. Offset realized gains with the harvested loss, reducing taxable income.
4. Optionally re-enter a similar (but not "substantially identical") position to maintain market exposure.

Short-Term vs Long-Term

Short-term losses first offset short-term gains; long-term losses first offset long-term gains. Remaining net losses cross over to offset the other category.

Annual Loss Deduction Limit

If total net losses exceed total gains, the excess is deductible against ordinary income up to $3,000 per year ($1,500 if married filing separately). Any remaining loss carries forward indefinitely to future tax years.

Ranking Unrealized Losses

Not all unrealized losses are equally valuable to harvest. This skill scores each opportunity on four dimensions:

1. Loss Magnitude

Larger dollar losses provide more tax savings. The raw loss is the difference between current market value and cost basis.

unrealized_loss = current_value - cost_basis  # negative when loss
tax_savings = abs(unrealized_loss) * marginal_tax_rate

2. Days Until Long-Term Threshold

A position approaching the 1-year holding mark deserves special consideration:

• If close to crossing into long-term territory, harvesting now locks in a short-term loss (offsets higher-taxed short-term gains).
• If already long-term, the loss offsets long-term gains (lower tax rate benefit).

days_held = (today - acquisition_date).days
days_to_long_term = max(0, 365 - days_held)

Positions with fewer days remaining until long-term are more urgent to evaluate because once they cross 365 days, a short-term loss becomes a less-valuable long-term loss.

3. Wash Sale Risk (Correlation Score)

The IRS wash sale rule prohibits claiming a loss if you buy a "substantially identical" security within 30 days before or after the sale. In crypto, the exact application is evolving, but prudent planning avoids re-entering the same token within the 61-day wash sale window (30 days before + sale day + 30 days after).

Correlation scoring: If you hold (or plan to re-enter) a position that is highly correlated with the harvested asset, wash sale risk increases. Score this as:

wash_sale_risk = 1.0  # if same token re-entry planned within 30 days
wash_sale_risk = correlation_coefficient  # if correlated substitute held
wash_sale_risk = 0.0  # if no re-entry or uncorrelated substitute

Higher wash sale risk reduces the effective score of the opportunity.

4. Available Gains to Offset

A harvested loss is only immediately useful if there are realized gains to offset. Score opportunities higher when:

• There are matching-type gains (short-term loss vs short-term gain).
• The loss amount does not greatly exceed available gains (diminishing marginal benefit beyond the $3K deduction cap).

offset_efficiency = min(1.0, available_matching_gains / abs(unrealized_loss))

Composite Score

def tlh_score(
    unrealized_loss: float,
    days_to_long_term: int,
    wash_sale_risk: float,
    offset_efficiency: float,
    weights: dict | None = None,
) -> float:
    w = weights or {
        "magnitude": 0.35,
        "urgency": 0.25,
        "wash_safety": 0.20,
        "offset_match": 0.20,
    }
    magnitude_score = min(abs(unrealized_loss) / 10_000, 1.0)
    urgency_score = max(0, 1.0 - days_to_long_term / 365)
    wash_safety_score = 1.0 - wash_sale_risk
    return (
        w["magnitude"] * magnitude_score
        + w["urgency"] * urgency_score
        + w["wash_safety"] * wash_safety_score
        + w["offset_match"] * offset_efficiency
    )

Net Benefit Calculation

Harvesting a loss is not free. Transaction costs (swap fees, slippage, gas) reduce the benefit.

def net_benefit(
    unrealized_loss: float,
    marginal_tax_rate: float,
    transaction_cost: float,
    re_entry_cost: float = 0.0,
) -> float:
    """Compute net dollar benefit of harvesting a loss.

    Args:
        unrealized_loss: Negative number representing the loss.
        marginal_tax_rate: Applicable tax rate (0.0 to 1.0).
        transaction_cost: Cost to execute the sell (fees + slippage).
        re_entry_cost: Cost to re-enter a substitute position.

    Returns:
        Net benefit in dollars. Positive means harvesting is worthwhile.
    """
    tax_savings = abs(unrealized_loss) * marginal_tax_rate
    total_costs = transaction_cost + re_entry_cost
    return tax_savings - total_costs

Rule of thumb: Only harvest when net_benefit > 0 by a meaningful margin. Very small losses are not worth the transaction costs and operational complexity.

Year-End "Use It or Lose It"

Near December 31, evaluate whether to accelerate harvesting:

1. Tally year-to-date realized gains (both short-term and long-term).
2. Identify unrealized losses that can offset those gains.
3. Prioritize losses that offset same-type gains (short-term loss vs short-term gain yields the highest tax rate differential).
4. Check the $3K excess limit: If net losses already exceed gains by $3K, additional harvesting this year has no immediate tax benefit (though the carryforward still has value).
5. Consider settlement timing: Ensure trades settle before year-end.

Wash Sale Compliance

The 61-Day Window

The wash sale rule applies to purchases of substantially identical securities within:

• 30 days before the sale (retroactive wash sale)
• The day of the sale
• 30 days after the sale

If triggered, the disallowed loss is added to the cost basis of the replacement shares, deferring (not eliminating) the tax benefit.

Compliance Strategies

Crypto-Specific Considerations

• The IRS has not explicitly ruled that the wash sale rule applies to cryptocurrency (as of 2025). However, proposed legislation may extend it.
• Prudent practitioners treat crypto as subject to wash sale rules for conservative planning.
• Different tokens (e.g., SOL vs ETH) are generally considered non-identical.
• Wrapped versions of the same token (e.g., SOL vs wSOL) may be considered substantially identical.

Annual Loss Carryforward Tracking

def compute_carryforward(
    realized_gains_st: float,
    realized_gains_lt: float,
    realized_losses_st: float,
    realized_losses_lt: float,
    prior_carryforward: float = 0.0,
    annual_deduction_limit: float = 3_000.0,
) -> dict:
    """Compute net tax position and carryforward.

    Returns dict with keys:
        net_st, net_lt, total_net,
        deduction_used, carryforward
    """
    net_st = realized_gains_st + realized_losses_st  # losses are negative
    net_lt = realized_gains_lt + realized_losses_lt
    total_net = net_st + net_lt - prior_carryforward

    if total_net >= 0:
        return {
            "net_st": net_st, "net_lt": net_lt,
            "total_net": total_net, "deduction_used": 0.0,
            "carryforward": 0.0,
        }

    excess_loss = abs(total_net)
    deduction_used = min(excess_loss, annual_deduction_limit)
    carryforward = max(0, excess_loss - annual_deduction_limit)
    return {
        "net_st": net_st, "net_lt": net_lt,
        "total_net": total_net,
        "deduction_used": deduction_used,
        "carryforward": carryforward,
    }

Prerequisites

• Python 3.10+
• No external dependencies for core calculations
• Portfolio data: cost basis, acquisition date, current market value per lot
• Tax parameters: marginal tax rate, filing status, prior carryforward

Capabilities

Quick Start

from datetime import date

# Define a portfolio position
position = {
    "symbol": "TOKEN-A",
    "cost_basis": 10_000.0,
    "current_value": 6_500.0,
    "acquisition_date": date(2025, 8, 15),
    "quantity": 500.0,
}

unrealized_loss = position["current_value"] - position["cost_basis"]  # -3500
days_held = (date.today() - position["acquisition_date"]).days
days_to_lt = max(0, 365 - days_held)

# Score the opportunity
score = tlh_score(
    unrealized_loss=unrealized_loss,
    days_to_long_term=days_to_lt,
    wash_sale_risk=0.0,
    offset_efficiency=0.8,
)
print(f"TLH score: {score:.3f}")

# Calculate net benefit
benefit = net_benefit(
    unrealized_loss=unrealized_loss,
    marginal_tax_rate=0.35,
    transaction_cost=15.0,
    re_entry_cost=15.0,
)
print(f"Net benefit: ${benefit:.2f}")

Use Cases

1. Quarterly portfolio review: Scan all positions for harvesting opportunities ranked by composite score.
2. Year-end tax planning: Identify optimal set of positions to harvest before December 31 given year-to-date gain/loss totals.
3. Ongoing monitoring: Flag positions that are approaching the long-term threshold where harvesting a short-term loss becomes urgent.
4. Carryforward management: Track multi-year loss carryforward balances and project when they will be fully utilized.
5. Transaction cost analysis: Determine minimum loss threshold worth harvesting given current fee environment.

Files

Important: This skill provides analytical tools for informational purposes only. All tax-related decisions should be reviewed by a qualified tax professional. Tax laws vary by jurisdiction and are subject to change.