Post-tax investing outside of retirement accounts can be extremely beneficial for high-income earners, particularly those who have their sights set on early financial independence or who are seeking to Coast FIRE. Arguably, the biggest advantage of investing outside of retirement accounts is that you can access these accounts before 59.5 years old without getting hit with a 10% early withdrawal penalty. However, with this sort of investing also comes taxable capital gains, which will be taxed unless offset by more sophisticated techniques that allow you to reduce this tax bill. Enter here, Bitcoin tax loss harvesting.
This article will serve as the ultimate guide for anyone who is thinking about tax loss harvesting Bitcoin. We discuss how I reduced my capital gains by $35,000 through tax loss harvesting Bitcoin, while being out of the Bitcoin market for a minimal amount of time. Next, we will lay out the basics of tax loss harvesting, including what a more traditional tax loss harvesting might look like. Then, we will discuss what makes Bitcoin unique and the potential arguments against Bitcoin Tax Loss Harvesting, so that you can decide the best course of action for your tax loss harvesting journey. Finally, we will include the step-by-step process I use to Tax Loss Harvest Bitcoin.
Caution: A word of caution is warranted here. There are reports from financial advisor friends of mine that they have had clients undergo audits by the IRS specifically because of tax loss harvesting large amount of Bitcoin and then using them to offset large capital gains. My hope is that this blog post could be utilized to mount your defense, if applicable, but many may find that “the juice isn’t worth the squeeze.”
Some ways to lower this risk are:
1) If tax loss harvesting while self-custodying, you could stay out of the market for 48-72 hours, which, given Bitcoin’s volatility, really will impact your economic risk (more below). Or safer yet is to stay out for 30 days and adhere to the Wash Sale rule, if you really want to be conservative.
2) Choose to utilize a brokerage account and tax loss harvest between non-substantially identical funds. For example, you may use IBIT and then tax loss harvest over to FBTC. This would require you to adhere to all of the normal wash sale rules (more below).
Either way, you absolutely should have a CPA involved before Tax Loss Harvesting Bitcoin.
Our Bitcoin Tax Loss Harvesting Story
Longtime members of the Money Meets Medicine community will know that I am a broadly diversified index fund investor. In fact, I think the basics are essential, and more than 85% of our portfolio is in index funds. Before you ever consider investing in Bitcoin, you should tackle the basics first.
To start your financial literacy journey, download a free copy of Jimmy’s best-selling book, The Physician Philosopher’s Guide to Personal Finance. You won’t read about Bitcoin there, but you should read it first.
My family first started investing in Bitcoin at the end of 2024 and the beginning of 2025 after a very, very long journey reading and studying about Bitcoin. This was after years of my brother-in-law, Jordan, trying to talk me into buying Bitcoin and being a very vocal skeptic. If you are a skeptic, but want to learn more and aren’t sure where to get started, I know it can be daunting. That’s why I created a Beginner’s Bitcoin Guide, which you can download here.
Download a free copy!
At first, we lump-summed some money into Bitcoin, and then we daily dollar cost averaged into Bitcoin. By the end of 2025, we had seen the price rise to more than $125,000 at one point, only to get knocked down to $90,000 (it would drop lower later). For many, this would be a cause for alarm! A drop of 30%!
As a lover of financial history, this gave me the opportunity to do two things: (1) Buy Bitcoin at a discount and/or (2) perform some Bitcoin Tax Loss Harvesting. We opted for for the latter.
The exact steps for how to tax loss harvest with Bitcoin are at the end of this post, but for now, let’s suffice it to say that we tax loss harvested $35,000 when this dramatic fall happened. This consisted of $10,000 of traditional tax loss harvesting from Bitcoin ETF investments inside of our brokerage account, and an additional $25,000 of tax loss harvesting through selling and buying Bitcoin through a Bitcoin exchange. All while keeping our money out of the market for the least amount of time possible.
But before we get ahead of ourselves, let’s start with the basics on tax loss harvesting, wash sale rules, etc. Or you can skip to the bottom to see the step-by-step process I used to tax loss harvest $25,000 in Bitcoin in one day.
What is Tax Loss Harvesting
Let’s start with the basics before we get into the complexities of Tax Loss Harvesting Bitcoin. If you already know the basics, feel free to skip to the Bitcoin-specific information.
Tax Loss Harvesting is a technique to reduce your tax bill by selling taxable assets you own that are currently at a loss, and then quickly buying back into a similar investment to “lock in” a paper loss for your investments without ever truly being out of the market. For example, let’s say someone invests $100,000 into VTI (or another total stock market ETF) within a brokerage account, and that $100,000 grows to $120,000.
If the investor were to take out the money, they would owe taxes on the $17,000 in capital gains that have grown from their original post-tax $100,000 investment in VTI (the initial investment will not be taxed against because this is post-tax money). If held for less than one year, the investor will owe ordinary income tax on this short-term capital gain. If held for more than a year, this is considered a long-term capital gain and would be taxed based on long-term capital gains tax brackets (below).
If this person were married, filed jointly, and had an income of $300,000, they would owe 15% on that $20,000 in gains. In other words, they would owe $3,000 in additional taxes that year. What if I told you that there was a way to take out the $120,000 without paying any tax at all? There is. It is called Tax Loss Harvesting.
2026 Capital Gains Tax Rate commitment test.
How To Reduce Capital Gains Through Tax Loss Harvesting
In continuing our example above, this married couple could offset their $3,000 in capital gains taxes through a $3,000 capital loss. Here is what that looks like in practice.
Let’s say during that investing timeline, they had additional post-tax investments. Let’s say that they had invested another $100,000 in VXUS, an international stock market index ETF. While the VTI was banging away to $120,000 the VXUS fund actually dipped to $80,000.
At the price of $80,000 this investor decided to “sell” their shares of VXUS and immediately invested that $80,000 back into the market into IXUS (ishared international total stock market index).
Why would they do this? For two reasons. First, VXUS and IXUS have a > 95% correlation in terms of how they perform. Yet, they are not “substantially identical,” which matters so that this investor avoids the Wash Sale Rule (more on this in a moment). This first point is important because, as the famous adage says, investing is not about timing the market, it is about time in the market. Putting money that is meant for a long-term investing timeline on the sidelines is almost always a bad idea. By selling VXUS and immediately purchasing IXUS at a loss, the investor has avoided ever really being out of the market.
The second reason this is a great move is that this investor has now locked in a $20,000 paper tax loss without being out of the market. They can then turn around and use this $20,000 to offset their $20,000 gain from their VTI in their portfolio, and now pay zero in capital gains tax. If they had not invested in VTI, they could have used $3,000 of their $20,000 in tax losses that they harvested and used this against their ordinary income. Any leftover tax losses would be carried over to the next tax year, where it could be used to offset another capital gain or another $3,000 off their ordinary income.
All without ever actually being out of the market and losing out on the potential growth there.
How do Wash Sales Impact Bitcoin Tax Loss Harvesting?
The TL;DR is that wash sale rules do not apply to Bitcoin if you self-custody it or own it on an exchange, but to understand why, we first must discuss the definition of a “wash sale.”
IRS Wash sale rules stipulate that you cannot “sell” a security to realize a paper loss and then immediately buy it back. Why? Because there would be no economic reason to do this other than to avoid taxes, which runs afoul of the Economic Substance doctrine. More on that in a bit.
In order for something to be considered a wash sale, the sale and purchase must have three components:
- It must be the sale/purchase of a security (e.g. stocks, bonds, ETFs, options, etc)
- Occur within the wash sale window (A 61-day period that includes the 30 days before, the day of, or 30 days after a sale), and
- Be considered “substantially identical.” Substantially identical for our purposes, means it follows the same underlying index and share class.
So, these are the three defining characteristics of what is required for a transaction to be considered a wash sale.
Do Wash Sale Rules Apply to Bitcoin?
But what about Bitcoin? If you sell bitcoin on day one, and then you buy bitcoin back on day 2 isn’t that substantially identical? And doesn’t that occur within the 61-day window?
The answer is yes and yes. However, Bitcoin isn’t classified as a security. However, it is important to realize that – even though wash sale rules do not apply to self-custodied Bitcoin because it is not a security – the wash sale rules DO apply to Bitcoin ETFs held within a custodial account. ETFs are securities. So, you’d want to tax loss harvest those in the same way we described above. For example, the $10,000 we tax loss harvested in our brokerage account consisted of selling iShares IBIT ETF and buying Fidelity’s BTCO. We performed these transactions on the same day, because IBIT and BTCO are not substantially identical.
Back to Bitcoin proper. Is Bitcoin really not considered a security? People talk about it like an “investment” all the time. According to the IRS, Bitcoin is considered a virtual currency and, in the words of the IRS itself,
“For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.” ~IRS Notice 2014-21
In other words, Bitcoin does not meet the very first requirement of a wash sale, which is to involve the selling/purchasing of a security. It is for this reason that you can sell and then immediately purchase Bitcoin without concern for violating the wash sale rules.
Or so one might think. When I posted about my family’s tax loss harvesting $35,000 in Bitcoin, it received some interesting interaction from a tax law attorney who warned about tax loss harvesting:
We will talk about each of these doctrines in turn, but according to this tweet, the easy answer here is to just not buy back any Bitcoin “immediately.” What does this mean, though? No one knows, but the most conservative method would be to wait 30 days after the sale.
That said, I’m an anesthesiologist (and financial literacy expert). In anesthesia, we live by the “trust, but verify” mantra. So, what is the merit of this claim that Bitcoin cannot be tax loss harvested “immediately” due to the step transaction and the economic substance rule mentioned above? Let’s look at each, in turn.
The Step Transaction Doctrine and Bitcoin Tax Loss Harvesting
The Step Transaction doctrine, in a nutshell, is the idea that any combination of financial moves will be considered “one” move if they have a certain intended result, namely to avoid taxes. In the words of a 2008 IRS Chief Counsel memorandum, it applies when “a series of transactions designed and executed as parts of a unitary plan to achieve an intended result … will be viewed as a whole regardless of whether the effect of so doing is imposition of or relief from taxation.”
In other words, if the sole purpose of something is to avoid taxation, any number of moves can be made, but these steps will be considered a single unitary plan. And the end result will be considered in terms of whether it is permissible.
The most common place for high-earners where this comes up involves the Backdoor Roth IRA method. For many high-earning physicians, directly contributing to a Roth IRA is not allowed. However, if someone places money into a traditional IRA, waits some time, and then converts it into a Roth IRA, that is technically allowed. Even the IRS officials have said as much.
The Backdoor Roth IRA Example
Could the IRS turn around and then apply the Step Transaction Doctrine and say that the end result is something that is disallowed (investing in a Roth IRA above certain income thresholds)?
The answer is yes, which is why most people advise waiting a certain amount of time before performing the second step so that they are not considered as fully and intentionally connected. This is absurd on the face of it, particularly if you perform Backdoor Roth IRAs every year… clearly they are connected steps as they are done annually. And if “waiting” is the solution, how long should you wait?
No one knows. Some advisors recommend a week. Others say convert in a month. The most conservative say you should wait a year. This is also one reason many advisors will not refer to this as a “Backdoor Roth” in any planning documents. These are all defensive moves because it isn’t 100% certain that this move would be allowed if truly scrutinized.
While the IRS has stated that the Backdoor Roth IRA is a permissible move, it has never clarified how long one must wait to avoid the step transaction doctrine, or if this wait nullifies the step transaction doctrine if performed annually. This is a risk that every Backdoor Roth-er takes, usually because of the argument that this is a “widely adopted” financial move reported on an 8606 each year by thousands of people. To date, it has also never been used by the IRS against the Backdoor Roth IRA mechanism.
The Step Transaction Doctrine and Bitcoin
That said, if you are not concerned about the Step Transaction Doctrine as it pertains to other areas of your portfolio, I’m not sure you should be when it comes to Bitcoin. In fact, there are no cases where it has ever been applied to Bitcoin or the Backdoor Roth IRA, which is one of the reasons Backdoor Roth IRA participants continue to perform the move.
That said, I would argue that the Step Transaction Doctrine doesn’t apply to Bitcoin anyway. To determine this, we can look at the three tests that are utilized to see whether the Step Transaction Doctrine applies:
- End-Result (Intent) Test — if the separate steps were really prearranged parts of a single transaction intended from the outset to reach the ultimate result.
- Mutual Interdependence (Interdependence) Test — if the steps are so interdependent that the legal relations created by one would have been fruitless without completion of the series.
- Binding Commitment Test — if there was a binding obligation at the time of the first step to complete all of the steps.
In other words, the Step Transaction Doctrine collapses steps only when the steps are artificial, and the result circumvents what the Code is trying to prevent. As mentioned above, with wash sales, Congress explicitly wrote a rule (IRC §1091) prohibiting a loss if you sell a security and buy a substantially identical security.
Bitcoin is not a security, so Congress intentionally did not apply §1091. It also fails the binding commitment test. When you sell Bitcoin, you are not bound to buy it back.
There is no “forbidden end result” being disguised. The end result is the exact one Congress intended: You may realize losses in property that is not a security. Because the Step Transaction Doctrine only prevents taxpayers from reaching outcomes Congress did not intend, it cannot override Congress’s explicit choice not to treat cryptocurrencies, including Bitcoin, as securities.
The Economic Substance Doctrine and Bitcoin Tax Loss Harvesting
This brings us to the second point brought up by our friendly tax attorney on X – the Economic Substance Doctrine (ESD). This doctrine is codified in IRC §7701(o) and applies to all federal taxes. Not just securities, and not just wash sales. In other words, even if wash sale rules and the transaction step doctrine do not apply to Bitcoin, the ESD could be applied.
The Economic Substance Doctrine states,
“In the case of any transaction to which the economic substance doctrine is relevant, such transaction shall be treated as having economic substance only if—
(A) the transaction changes in a meaningful way (apart from Federal income tax effects) the taxpayer’s economic position, and
(B) the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into such transaction.”
~IRS §7701(o)(1) Application of doctrine
In other words, in order to avoid having this rule applied to a Bitcoin tax loss harvesting situation, one must argue that the sale and purchase of the Bitcoin had economic substance by either (a) changing their “economic position” or (B) having a substantial purpose outside of lowering their tax bill.
In order to determine whether the sale and purchase of Bitcoin changes an economic position, we need to determine what that language means. The layman’s version is that it changes your financial situation (outside of any potential tax benefit). Some of the key ways your economic position can change are shown in the image below.
So, does selling and buying Bitcoin change your economic position? Well, it depends. But, it certainly can. Here are a few ways.
Changes in Economic Position: Bitcoin Tax Loss Harvesting
One of the most obvious ways that buying and selling bitcoin changes your economic position is that, given its volatility, even being out of the market for only an hour can meaningfully change your risk or loss. The price (and spread) can change dramatically and quite quickly.
Another way that selling and buying Bitcoin meets this criteria is if you self-custody Bitcoin. In order to sell this Bitcoin, one of the most common route is to take it out of your cold-storage wallet and place it back on the exchange in order to sell/buy Bitcoin. This changes the liquidity of your Bitcoin as you can more easily transfer it into your bank account from the exchange (I do not recommend bringing your cold wallet into a bank and trying to get them to give you cash for it).
But I think one of the best (and likely overlooked) use cases for Buying/Selling Bitcoin on an exchange that leads to a true change in your economic position is dealiing with UTXO Fragmentation.
The UTXO Fragmentation Problem
With each Bitcoin transaction (Buying, selling, sending, etc), there is a cost to this transaction. This is how miners get paid to verify transactions. So, the fewer transactions that are necessary to complete a function, the less it will cost you.
Let’s give an example. Let’s say that you had 5 one-dollar bills. And let’s say that with the use of each one-dollar bill, you also encountered a cost of 5 cents to verify that then one-dollar bill was real. You set out to buy a product that costs $4.50. In order to perform this transaction, you’d have to use each of your one-dollar bills, incurring 5 different transaction fees (5 cents x 5). So, your total cost to buy the $4.50 item would be $4.75.
Now, let’s say instead that you had 1 five-dollar bill. Instead of having five individual transaction fees, you’d have one. So, you’d buy the $4.50 product, have one transaction fee of 5 cents, and your total cost would be $4.55, or 20 cents lower than if you used the five individual one-dollar bills.
This describes UTXO fragmentation. With each Bticoin purchase, unspent transaction outputs and inputs are created. When you go to use your Bitcoin to purchase something, you will have to potentially combine multiple Bitcoin transactions (each with varying unspent transaction outputs) to perform the purchase, which results in transaction fees for each of the Bitcoin transactions that are used to make the purchase.
If, however, you had larger denominations before your future purchase, you could reduce the UTXO fragmentation and lower the cost of buying something in the future. This can be done by taking multiple Bitcoin transactions and selling them (or transferring between addresses), and then buying back Bitcoin. You’ll lose some money in the process due to transaction costs, but you will have solved the UTXO fragmentation problem, reducing your future costs and, importantly, improving your economic position.
Bringing it all together, there are multiple reasons that selling and buying Bitcoin causes a change in economic position and, thus, in economic substance. There are very real transaction costs; the Bitcoin market can (and does) shift dramatically, which changes your risk, liquidity can be altered by moving your Bitcoin to an exchange from cold-storage, and you are reducing future costs of transactions by reducing UTXO fragmentation.
Oh, and you also happen to be tax loss harvesting while performing all of these functions. That’s like killing 5 birds with one stone. Now, whether your situation is different and doesn’t meet what I just described, that’s for you to decide, but assuming you are still along for the ride here is the step-by-step process we use to Tax Loss Harvest our Bitcoin.
Step-by-Step Guide to Bitcoin Tax Loss Harvesting
Caution: Again, a word of caution here. Before embarking on this journey, employ the services of an accountant. This document outlines what I think is a compelling argument for Tax Loss Harvesting Bitcoin. To avoid an IRS audit, the most conservative route would be to stay out of the Bitcoin market for 30 days and adhere to wash sale rules. That said, you are taking real risk (meeting Economic Substance Doctrine) given the volatility of Bitcoin and its potential to skyrocket during your 30-day absence. So, consult both your risk tolerance and a CPA before proceeding.
Our typical process for buying Bitcoin involves using a Bitcoin-specific exchange called River. I’m a big fan of them and discuss why in the free Beginner’s Guide to Bitcoin. It is also much easier to track transactions if you only use one exchange.
Once it reaches a reasonable threshold, we transfer the money from River to a cold-storage wallet (also discussed in the beginner’s guide). This creates multiple UTXOs both while on River and then when transferred. It should be noted that not all exchanges produce UTXOs for individuals on an exchange, but with River, this is the case.
Once the market took a nose dive, we then followed the following steps:
1. Determine the cost basis for your Bitcoin Transactions to determine if you have a loss worth tax loss harvesting.
For example, if your cost basis for how much you have spent per Bitcoin was $105,000, and the current price of Bitcoin was $90,000, you might have a significant tax loss harvesting opportunity. To track our basis, given the number of transactions we have, I use CoinLedger (Money Meets Medicine has no relationship with CoinLedger, and this is not an endorsement – do your own research on what suits your needs. It is a paid product, and there are others out there).
2. Transfer from Cold Wallet to Exchange
Assuming you have a sizeable tax loss harvesting opportunity, the next step is to transfer from cold wallet to River (which does not reduce the UTXO from the multiple transactions as it just gets added to River’s giant omnibus wallet).
Note: If your money never left River, then there is no need to transfer from your cold-wallet to River… but the deeper you dive into Bitcoin the more likely you will feel the need to self-custody your Bitcoin. Download the guide above to learn more.
3. Sell the transactions you can at a loss.
Sell all of the transactions that are currently at a loss to the River exchange.
It is important to note that a transaction fee will occur. So, you will actually purchase slightly less than what you owned in the next step. Your tax loss harvesting amount needs to be high enough to offset this transaction cost. For example, you could sell 0.5 BTC and when you use the money to buy back, end up with 0.48 BTC. This is one of the reasons it is definitely a change in economic position, as discussed above.
That said, do not tax loss harvest if your fees are more than what you will harvest.
4. Wait for settlement
Once you sell, you’ll have to wait for the transactions to be verified, particularly if it is a large sum of money. It took an hour for mine to settle. Don’t freak out. This just gives an opportunity for the market to move and for your economic position to change via risk.
5. Buy back as much BTC as you can
Buy back – in a single transaction – all the Bitcoin you can with the money you have from your sale. Again, it will be slightly less than what you sold due to transaction fees. This is totally normal, and needs to be accounted for before pulling the trigger on whether it is worth it or not.
6. Confirm the tax loss harvesting
Using your accounting software of choice, confirm your tax loss harvesting amount that you’d then provide to your accountant. Speaking of which that brings us to the last point on Bitcoin Tax Loss Harvesting…
Consult a Professional Before Bitcoin Tax Loss Harvesting
It goes without saying, but I’ll say it anyway: If you are thinking about doing this, you need to consult your accountant to get their thoughts on this. Hopefully, you can send them this article to help them better understand the argument behind why tax loss harvesting with Bitcoin is not only feasible, but defendable, and worthwhile given the volatility.
I don’t recommend you wade into these waters lightly either. Learn about Bitcoin. Study Bitcoin. And only after you have a very high conviction should you consider putting any money into Bitcoin.
That said, if you can get behind the logic laid out in this article, and your accountant can, too… well, it turns Bitcoin’s volatility from a seeming curse into a blessing as you can reset your cost basis anytime significant dips in the market happen. You can then use that to offset other capital gains or against your ordinary income for year’s to come.
Disclaimer: Dr. Jimmy Turner is a practicing anesthesiologist, author of The Physician Philosopher’s Guide to Personal Finance, and host of The Money Meets Medicine podcast. Though he is a financial literacy expert, he is not an accountant, tax attorney, or financial advisor. Do your own research in conjunction with consulting with financial experts before making any financial decisions. This article is generalized education in nature only.
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