How to File Crypto Taxes Losses: Offset Capital Gains with Tax Loss Harvesting

Have you traded crypto in New York over the past year? If your portfolio was up one month and underwater the next, then you already know how volatile the currency you are working with is. However, when crypto tax losses are handled correctly, they can reduce your tax bill. Of course, you can’t game the system in New York with its federal laws on digital assets, but you can apply the rules strategically with a crypto tax CPA’s expertise so you don’t pay more than you legally owe. This taxing guide explains how to file crypto taxes losses while adhering to the rules placed by the IRS.

1. How Does the IRS View Crypto Losses?

Although you’d expect a virtual currency to be treated as currency for taxing purposes, the Internal Revenue Service (IRS) treats cryptocurrency as property. This classification is the foundation of all crypto taxation regulations.

Since crypto is a property, you create a taxable event in any of the following instances:

• Selling crypto for fiat currency (e.g., U.S. dollars).
• Trading one type of cryptocurrency for another (e.g., Bitcoin for Ethereum).
• Using crypto to pay for goods or services (e.g., buying a coffee or a car).
• Exchanging crypto for other property.

If you sell for more than you paid, that is a capital gain. In contrast, if you sell for less, that is a capital loss.

Another term you need to be familiar with is ‘unrealized losses’. These losses don’t have tax implications until crypto is sold. For example, if you buy 1 Bitcoin (BTC) for $30,000 but the price drops to $25,000, you have an unrealized loss of $5,000. Until you sell the BTC for $25,000, this loss is categorized as an unrealized loss.

Watching a token drop in value while it sits in your wallet does nothing for your taxes. The loss only becomes usable once you actually sell or exchange the asset.

2. What is Crypto Tax Loss Harvesting?

Tax loss harvesting is the practice of intentionally selling crypto that is down in value so that unrealized losses become useful for tax purposes. This is a well-known strategy that traditional accountants and investors have applied with stocks and funds, which works for crypto as well since it’s treated as property.

Once the loss is realized after a sale, a crypto tax professional will use it to offset capital gains from other crypto trades, stocks, or even real estate. If your losses exceed your gains, you can deduct up to $3,000 against ordinary income per year, and the remainder is carried forward to future tax years.

3. How Crypto Losses Offset Capital Gains

The IRS requires a specific order when applying losses. First and foremost, losses offset gains of the same type:

• Short-term losses offset short-term gains.
• Long-term losses offset long-term gains.

After that, any remaining losses can be applied across categories.

If you still have excess losses after wiping out gains, you can deduct up to $3,000 against income like wages or freelance earnings.

This is where many New York filers miss opportunities. Without proper tracking via crypto bookkeeping services, these losses get buried, and future deductions disappear.

4. Step-by-Step Crypto Tax Loss Harvesting Process

Start by gathering every crypto transaction you made during the year. That includes trades between tokens, sales to cash, and crypto used to pay for goods or services. Dates and prices are also necessary for recording cost basis.

Next, identify assets that were sold for less than you paid. These are your realized losses. If you still hold losing positions and want to use them for the current tax year, they must be sold before December 31st.

Afterwards, it’s time to fill in the forms. Begin by listing your crypto sales and trades on Form 8949. Then add everything up on Schedule D, which calculates your total gain or loss for the year. These results get included on your main tax return (Form 1040). Crypto tax software can fill out these forms, but you still need to make sure the numbers are right or have a New York crypto tax accountant review them.

A skilled crypto tax CPA will also take advantage of the fact that wash sale restrictions currently don’t apply for crypto. In other words, this means you can sell a token at a loss and buy it back shortly after without losing the deduction. Many New York traders use this approach to realize losses while maintaining market exposure. That said, future law changes could alter this treatment, which is why a leading cryptocurrency accounting firm in New York always stays current.

5. More Tips for Crypto Investors and Businesses in NY

Individual traders and businesses engaging in digital asset management end up paying more tax than necessary in the years that follow due to three common mistakes. When reporting your crypto transactions in 2026,

1. Even if no tax is owed, report every crypto transaction since crypto reporting is an IRS regulation.
2. In most cases, stolen or lost crypto is not deductible from your taxes. Rules for theft of crypto are still quite narrow.
3. If your crypto bookkeeper fails to track losses, you will not be able to carry losses forward.

By using reliable tracking software and working with a tax professional who understands crypto, you can make sure that your crypto tax reporting is accurate and in par with New York’s capital gains rules.

Don’t wait until April to piece everything together, as it leads to missed deductions and rushed filings. Crypto accountants also note that it helps to review your portfolio before the year ends. A short check-in in November or December can open opportunities that are gone once the calendar flips.

Book a free consultation with an experienced crypto tax CPA at OnChain Accounting to review your crypto records and see where you may be able to reduce your tax bill.