✍️ Written by Davit Cho

Crypto Tax Specialist & CEO at JejuPanaTek
13+ Years Experience | Patent #10-1998821 | IRS Compliance Expert

📧 davitchh@proton.me

📅 Published: February 7, 2026 | Last Updated: February 7, 2026

Bitcoin Down 50% From ATH — Tax-Loss Harvesting Mega Guide 2026: Turn This Crash Into Thousands in Tax Savings

Bitcoin just crashed 50% from its all-time high. On October 2025, BTC hit $126,000. Today — February 7, 2026 — it's trading around $68,000, briefly touching $60,000 earlier this week.

Morningstar called it the worst week since FTX collapsed. CNBC is throwing around the phrase "crypto winter." NPR is asking "Trump promised a crypto revolution — why is bitcoin crashing?"

Most investors are panicking. But smart investors? They're doing the opposite. They're harvesting tax losses — turning this crash into thousands of dollars in tax savings that the IRS legally owes them back.

And here's the kicker: unlike stocks, crypto has NO wash sale rule in 2026. That means you can sell at a loss, immediately buy back, lock in the tax deduction, and keep your exact same position. This loophole may close soon — but right now, it's wide open.

This guide shows you exactly how to execute tax-loss harvesting step-by-step, how much you can save, and what IRS rules you need to follow.

🚨 Why This Matters RIGHT NOW

📉 BTC: $126K → $68K (down 46%)
📉 ETH: $4,100 → $2,000 (down 51%)
📉 SOL: $260 → $110 (down 58%)

💰 If you bought BTC at $100K and sell at $68K, that's a $32,000 deductible loss.
💰 At 37% tax bracket, that saves you $11,840 in taxes.
💰 And you can buy back immediately — no 30-day wait like stocks.

⏰ This window closes if Congress passes the wash sale extension to crypto in 2026.

📑 Table of Contents

1. The February 2026 Crash — What Happened and Why
2. What Is Tax-Loss Harvesting? The Basics Explained
3. How Crypto Tax-Loss Harvesting Works (Step-by-Step)
4. The Crypto Wash Sale Advantage — Why 2026 May Be Your Last Chance
5. Real Scenarios: How Much You Can Save
6. Your Tax-Loss Harvesting Action Plan (Do This Today)
7. IRS Reporting: Form 8949, Schedule D, and 1099-DA
8. Common Mistakes That Destroy Your Tax Savings
9. FAQ: 20 Critical Tax-Loss Harvesting Questions

1️⃣ The February 2026 Crash — What Happened and Why

Bitcoin's 50% plunge from its all-time high didn't happen overnight. It was a cascade of events that accelerated through January and exploded in the first week of February 2026.

Timeline of the Crash

Date	Event	BTC Price
October 2025	All-time high reached	$126,000
December 2025	Year-end selloff, tax-loss harvesting begins	$95,000
January 2026	Fed holds rates, tariff fears, institutional outflows	$88,000
Feb 3-4, 2026	Trump tariff escalation, risk-off selloff	$72,000
Feb 5, 2026	Flash crash — BTC briefly hits $60K	$60,000
Feb 6, 2026	Bithumb $40B BTC error adds chaos	$65,000
Feb 7, 2026	Partial recovery, volatility continues	~$68,000

What Caused the Crash?

Multiple factors converged simultaneously. Trump's tariff escalation triggered a broad risk-off selloff across all markets. The Fed's decision to hold rates steady crushed hopes of rate cuts that crypto bulls were counting on. Institutional investors — who flooded into Bitcoin ETFs throughout 2025 — began unwinding positions aggressively.

Ethereum got hit even harder, dropping over 51% from its high. Solana fell 58%. Altcoins across the board are down 60-80%. Fundstrat's Tom Lee says crypto "looks like it's bottoming," but the damage is already done for portfolios.

On February 6, South Korean exchange Bithumb accidentally distributed 620,000 BTC ($40+ billion) to 695 users due to an employee error, temporarily crashing BTC to $55,000 on that exchange. While Bithumb recovered 99.7% of the Bitcoin, the incident added fuel to an already panicking market.

💡 The Opportunity: Every crash creates a tax-loss harvesting window. Bitcoin has had seven 50%+ corrections since 2014, and every time, investors who harvested losses during the dip saved thousands on their tax bills while maintaining their long-term positions.

2️⃣ What Is Tax-Loss Harvesting? The Basics Explained

Tax-loss harvesting (TLH) is the strategy of selling an asset at a loss to offset taxable gains — reducing the amount of tax you owe. It's one of the most powerful legal tax reduction tools available to investors.

Here's the core concept: When you sell crypto at a loss, that loss becomes a tax deduction. You can use it to offset capital gains from other investments (crypto, stocks, real estate). If your losses exceed your gains, you can deduct up to $3,000 per year against ordinary income, and carry the rest forward to future years — indefinitely.

How Losses Offset Taxes

Scenario	Without TLH	With TLH
Stock gains	$50,000 taxable	$50,000 taxable
Crypto losses harvested	$0 (didn't sell)	-$30,000
Net taxable gains	$50,000	$20,000
Tax at 24% bracket	$12,000	$4,800 (saved $7,200)

The key insight is that you don't have to actually lose money to benefit from TLH. You sell at a loss to lock in the tax deduction, then immediately buy back the same crypto. Your portfolio stays the same — but your tax bill drops.

⚠️ Important: The "sell and immediately buy back" strategy only works for crypto because there's no wash sale rule for digital assets in 2026. For stocks, the IRS requires a 30-day waiting period. More on this in Section 4.

3️⃣ How Crypto Tax-Loss Harvesting Works (Step-by-Step)

Here's the exact process, using a real example from this week's crash:

Example: You Bought 1 BTC at $100,000

Step	Action	Result
1	Identify your loss: You hold 1 BTC bought at $100K, now worth $68K	Unrealized loss: -$32,000
2	Sell 1 BTC at $68,000 on your exchange	Realized loss: -$32,000 (now tax-deductible)
3	Immediately buy back 1 BTC at $68,000	You still hold 1 BTC (new cost basis: $68K)
4	Use $32K loss to offset gains on your tax return	Tax savings: up to $11,840 (at 37%)
5	If BTC recovers to $100K, your gain starts from $68K basis	Future gain: $32K taxable (but you already saved $11.8K)

Your portfolio is identical before and after — you still own 1 BTC. But you've locked in a $32,000 tax deduction. The trade-off is a lower cost basis going forward, meaning when BTC eventually recovers, you'll have a larger gain. But you got the tax savings now, and the future tax is deferred — potentially for years.

💡 Pro Tip: If you have multiple lots purchased at different prices, use Specific Identification (Spec ID) to sell only the highest-cost-basis lots first. This maximizes your loss. Most crypto tax software supports this automatically.

How Losses Are Applied (IRS Rules)

The IRS applies losses in a specific order:

• 📌 First: Short-term losses offset short-term gains (taxed up to 37%)
• 📌 Second: Long-term losses offset long-term gains (taxed at 0-20%)
• 📌 Third: Remaining losses offset the opposite type of gain
• 📌 Fourth: Up to $3,000 of net losses offset ordinary income per year
• 📌 Fifth: Excess losses carry forward indefinitely to future years

✅ Best Strategy: Harvest short-term losses first — they offset short-term gains which are taxed at your highest income rate (up to 37%). Short-term losses offsetting short-term gains give you the biggest tax bang per dollar.

4️⃣ The Crypto Wash Sale Advantage — Why 2026 May Be Your Last Chance

This is the single biggest advantage crypto investors have over stock investors — and it may disappear soon.

The Wash Sale Rule: Stocks vs Crypto

Rule	Stocks & Securities	Crypto (2026)
Wash Sale Rule Applies?	YES	NO
30-Day Wait Required?	Yes — must wait 30 days to rebuy	No — can rebuy immediately
Loss Disallowed if Rebuy?	Yes — loss is disallowed	No — loss is fully deductible
Practical Impact	30-day market risk	Zero market risk — harvest and hold

For stocks, if you sell Apple at a loss and buy it back within 30 days, the IRS disallows the loss entirely. This is the wash sale rule (IRC Section 1091). It was written in 1929 and has never been updated to include crypto.

Since crypto is classified as "property" (not a "security") under IRS Notice 2014-21, the wash sale rule doesn't apply. You can sell Bitcoin at a loss and buy it back one second later. The loss is fully deductible.

⚠️ WARNING — This May Change: Multiple bills in Congress (including the proposed Digital Asset Anti-Money Laundering Act) include provisions to extend the wash sale rule to crypto. If passed, you would need to wait 30 days before rebuying — and the sell-and-immediately-rebuy strategy would be dead. 2026 may be the last year this works.

5️⃣ Real Scenarios: How Much You Can Save

Let's run the numbers for common situations in this crash.

💰 Scenario 1: The Post-Election Buyer

Bought: 2 BTC at $105,000 (November 2024 — after Trump election)
Current Value: 2 BTC × $68,000 = $136,000
Cost Basis: 2 BTC × $105,000 = $210,000
Harvestable Loss: -$74,000
Tax Savings (37% bracket): $27,380
Tax Savings (24% bracket): $17,760
Action: Sell both BTC, immediately rebuy. Pocket the tax deduction.

💰 Scenario 2: The ETH Bull

Bought: 20 ETH at $3,500 (July 2025)
Current Value: 20 ETH × $2,000 = $40,000
Cost Basis: 20 ETH × $3,500 = $70,000
Harvestable Loss: -$30,000
Tax Savings (37% bracket): $11,100
Also has: $45,000 in stock gains from 2026
Net taxable: $45K - $30K = $15,000 (instead of $45K)

💰 Scenario 3: The Altcoin Portfolio

Holdings: SOL bought at $220 (now $110), AVAX bought at $55 (now $18), LINK bought at $28 (now $12)
Total Invested: $15,000
Current Value: $5,200
Harvestable Loss: -$9,800
No other gains to offset? Deduct $3,000 against ordinary income this year, carry $6,800 forward
Tax Savings Year 1: $1,110 (at 37%)
Future Years: Additional $2,516 in savings as carryforward is applied

💰 Scenario 4: The Big Portfolio — $500K+ in Losses

Bought: 5 BTC at $120,000 (October 2025 peak)
Current Value: 5 BTC × $68,000 = $340,000
Cost Basis: 5 BTC × $120,000 = $600,000
Harvestable Loss: -$260,000
Has $150K in other capital gains: Offset completely = $0 tax on gains
Remaining: $110K loss carried forward
Tax Savings This Year (37%): $56,610
Future Carryforward: $110K × years of additional deductions

6️⃣ Your Tax-Loss Harvesting Action Plan (Do This Today)

Don't overthink this. If you have unrealized losses, act now while prices are low. Here's your step-by-step plan:

Step	Action	Time Needed
1	Review every position across all exchanges and wallets. List each asset, purchase date, cost basis, and current value. Identify all positions with unrealized losses.	30 minutes
2	Calculate total harvestable losses. Use crypto tax software (CoinTracker, Koinly, TaxBit) to see exact unrealized losses by lot. Prioritize highest-loss positions.	30 minutes
3	Check your 2026 gains. Do you have capital gains from stocks, real estate, or other crypto sales this year? Your harvested losses will offset these first.	15 minutes
4	Execute the sell. Sell all loss positions on your exchange. Use market orders for speed — don't try to time the exact bottom. The tax deduction is the goal, not the price.	10 minutes
5	Immediately rebuy. Buy back the exact same crypto at market price. No 30-day wait required for crypto. Your portfolio is restored — with a new, lower cost basis.	5 minutes
6	Document everything. Screenshot your sell and buy confirmations. Record the exact time, price, quantity, and exchange. Save transaction IDs. You'll need this for Form 8949.	10 minutes
7	Update your tax software. Import the new transactions into CoinTracker/Koinly. Verify the loss is correctly calculated and will appear on your Form 8949.	15 minutes

⏱️ Total Time: About 2 hours. Potential savings: thousands to tens of thousands of dollars. This might be the highest ROI 2 hours of your year.

7️⃣ IRS Reporting: Form 8949, Schedule D, and 1099-DA

Harvesting losses is only half the battle. You must report them correctly to the IRS to get the deduction. Here's how:

Reporting Flow

Form	What Goes Here	Key Fields
1099-DA	Received from exchange (by Feb 17, 2026)	Proceeds, cost basis, date acquired/sold
Form 8949	Each individual sale — your loss transactions go here	Asset, dates, proceeds, basis, gain/loss
Schedule D	Summary of all gains/losses from Form 8949	Total short-term, long-term, net gain/loss
Form 1040	Final tax return — Schedule D total flows here	Line 7: Capital gain or (loss)

For the sell-and-rebuy strategy, you'll have two transactions on Form 8949: the sell (which generates the loss) and a new purchase (which establishes the new cost basis). The sell is what creates your deduction. The rebuy just resets your position.

Your exchange will report the sell on your 1099-DA. The IRS will see it. Make sure your Form 8949 matches what the exchange reports. Discrepancies trigger automated notices.

💡 1099-DA Deadline: February 17, 2026 is the deadline for exchanges to send your 1099-DA. If you harvest losses today (February 7), this transaction will appear on your 2026 tax return filed in April 2027 — not your 2025 return. Plan accordingly.

8️⃣ Common Mistakes That Destroy Your Tax Savings

❌ Mistake #1: Not Documenting the Transactions

You sell and rebuy but don't screenshot anything. Later, your tax software can't calculate the correct cost basis. You lose the deduction or report it wrong, triggering an IRS notice. Fix: Document everything in real-time.

❌ Mistake #2: Forgetting About Cross-Exchange Transactions

You sell on Coinbase but rebuy on Kraken. Each exchange only sees half the picture. Your 1099-DAs won't match your full activity. Fix: Use crypto tax software that consolidates all exchanges.

❌ Mistake #3: Harvesting Losses on Crypto You Need to Sell Soon

If you plan to sell crypto within 30 days to pay bills, don't harvest and rebuy — you'll create an unnecessary taxable event on the rebuy. Just sell once when you need the cash. Fix: Only harvest-and-rebuy positions you plan to hold long-term.

❌ Mistake #4: Ignoring the New Cost Basis

After rebuying, your cost basis resets to the lower price. If BTC goes back to $100K, you'll owe tax on a $32K gain (from $68K basis) instead of $0. You got the tax savings upfront, but don't forget this changes your future tax picture. Fix: Factor in future tax liability when deciding how much to harvest.

❌ Mistake #5: Selling on a DEX and Forgetting to Report

DEX transactions aren't reported on 1099-DA. If you harvest losses on Uniswap, the IRS won't get a form — but you still need to report it yourself. Fix: Use on-chain tax software to capture DEX activity.

❌ Mistake #6: Assuming the Wash Sale Rule Won't Ever Apply

Congress could pass legislation extending the wash sale rule to crypto retroactively. While unlikely, it's a risk. Fix: Harvest losses now while the window is definitively open. Don't wait.

9️⃣ FAQ: 20 Critical Tax-Loss Harvesting Questions

❓ 1. Can I harvest losses on crypto I've held for years?

Yes. If you bought BTC at $60K in 2021, it went to $126K, and is now at $68K, you don't have a loss because your cost basis ($60K) is below current price ($68K). But if you bought at $100K in late 2024, you have a $32K loss. TLH only works if current price is below your cost basis.

❓ 2. Is there a limit to how much loss I can harvest?

No limit on harvesting. You can realize unlimited losses. The limit is on how you use them: losses first offset capital gains (unlimited), then up to $3,000 against ordinary income per year. Excess carries forward indefinitely.

❓ 3. Can crypto losses offset stock gains?

Yes. Capital losses from crypto can offset capital gains from stocks, real estate, and any other capital asset. They're all reported on the same Schedule D and netted together.

❓ 4. What if I don't have any gains this year?

You can still deduct $3,000 against ordinary income (salary, freelance income, etc.) and carry the rest forward. A $30K harvested loss with no gains = $3K deduction this year + $27K carryforward for future years.

❓ 5. Do I pay trading fees when I sell and rebuy?

Yes. Factor in exchange fees and potential spread. On major exchanges, this is typically 0.1-0.5% per trade. For a $68K BTC sell-and-rebuy, expect ~$68-$340 in fees. Compare this to thousands in tax savings — the ROI is massive.

❓ 6. Can I sell BTC and buy ETH to harvest the loss?

Yes. Since there's no wash sale rule for crypto, you can sell BTC at a loss and buy any other crypto (or even rebuy BTC immediately). Swapping to a different asset also works — but then your portfolio changes.

❓ 7. Does this work for NFTs?

Yes. NFTs that have dropped in value can be sold at a loss to harvest tax deductions. However, NFT liquidity is much lower, so finding a buyer at fair market value may be difficult. Consider selling on OpenSea at current floor price.

❓ 8. What about staking rewards — can I harvest losses on those?

Yes. Staking rewards are taxed as income when received. If the token drops after you received the reward, you have a loss on that specific lot. Sell the reward tokens at the lower price and deduct the loss.

❓ 9. How often can I harvest losses?

As often as you want. Every time the price drops below your cost basis, you can sell and rebuy. Some investors harvest losses weekly or monthly during volatile periods. Each harvest resets your cost basis lower.

❓ 10. Will the IRS flag frequent sell-and-rebuy activity?

Not if you report correctly. Tax-loss harvesting is 100% legal. The IRS only cares that your Form 8949 accurately reports each transaction. Frequent trading may make you a "trader" rather than "investor" for tax purposes, which has different implications — consult a CPA if you trade daily.

❓ 11. What's Specific Identification and why does it matter?

If you bought BTC at multiple prices ($90K, $100K, $120K), Specific Identification lets you choose which lot to sell. Selling the $120K lot creates a bigger loss than the $90K lot. Most crypto tax software supports Spec ID — use it to maximize your deduction.

❓ 12. Can I harvest losses in a retirement account (IRA)?

No. Transactions in IRAs, 401(k)s, and other tax-advantaged accounts don't generate taxable gains or deductible losses. TLH only works in taxable (non-retirement) accounts.

❓ 13. What if Bitcoin recovers right after I sell?

If you rebuy immediately (which you should), you still own the same amount of BTC. You captured the loss for tax purposes and you're still in the position. The only difference is your cost basis is now lower.

❓ 14. Is selling stablecoins (USDT/USDC) at a loss possible?

Stablecoins are pegged to $1, so they rarely create gains or losses. However, if you bought USDT and it briefly depegged below $1, that loss is technically harvestable. In practice, the amounts are too small to be worth it.

❓ 15. How does TLH interact with the $3,000 ordinary income deduction?

The $3,000 limit only applies to net losses after offsetting all capital gains. If you have $50K in losses and $30K in gains, your net loss is $20K. You offset all $30K in gains (no tax), deduct $3K against income, and carry $17K forward.

❓ 16. What crypto tax software is best for TLH?

CoinTracker, Koinly, and TaxBit all support tax-loss harvesting identification. CoinTracker has a dedicated TLH dashboard showing unrealized losses across your portfolio. Koinly offers Spec ID. TaxBit integrates with 1099-DA reporting.

❓ 17. Can I harvest losses on DeFi positions?

Yes. If you provided liquidity to a pool and suffered impermanent loss, or if your DeFi tokens dropped, you can sell at a loss. The challenge is accurate cost basis tracking for complex DeFi positions — use specialized software.

❓ 18. What if I'm married filing jointly?

Married filing jointly still gets only $3,000 in net loss deduction against ordinary income (not $6,000). However, you can offset unlimited capital gains from both spouses' portfolios. Coordinate TLH across both accounts for maximum benefit.

❓ 19. Should I harvest losses on every position or just the biggest ones?

Focus on the biggest losses first — they give you the most tax savings per transaction. Small positions with $50-100 losses may not be worth the administrative hassle. A good rule of thumb: harvest if the potential tax savings exceed $500.

❓ 20. Is this guide applicable outside the US?

This guide is US-specific (IRS rules, Form 8949, Schedule D). Many countries have similar capital loss deduction rules, but the wash sale exception for crypto varies. UK, Canada, and Australia have different rules — check local tax law.

📚 Related Articles You Must Read

📄 1099-DA Crypto Tax Form 2026

First year guide — what it is, who receives it, how to use it for filing

Read Full Guide →

🔄 Crypto Wash Sale Rules 2026

Why there's still no 30-day waiting period — and when that might change

Read Full Guide →

🛡️ Offshore Crypto & CARF 2027

IRS CEO Bisignano's enforcement playbook for US expats

Read Full Guide →

💱 DeFi Form 8949 Audit Risk

IRS mismatch triggers automatic audit — how to report correctly

Read Full Guide →

🏆 Best Crypto Tax Software 2026

CoinTracker vs Koinly vs TaxBit — compared for TLH

Read Full Guide →

📆 Q1 2026 Crypto Tax Calendar

All critical deadlines and action items this quarter

Read Full Guide →

⚖️ Legal Disclaimer

This article is for informational and educational purposes only. It does not constitute legal, tax, investment, or financial advice. Tax-loss harvesting involves tax and investment decisions that should be made with professional guidance.

• IRS Notice 2014-21 — Crypto classified as property
• IRC Section 1091 — Wash sale rule (currently not applied to crypto)
• IRC Section 1211 — Capital loss deduction limits
• Market data sources: Reuters, CNBC, CoinDesk, Morningstar (February 7, 2026)
• Price data: Bitcoin $68K, Ethereum $2K, Solana $110 (approximate as of publication)

⚠️ WARNING: Crypto prices are extremely volatile. Prices referenced in this article may have changed significantly by the time you read this. Always verify current prices before executing trades. The wash sale exemption for crypto may be subject to future legislative changes.

Consult a qualified CPA, EA, or tax attorney before making any tax-related decisions.

Last Updated: February 7, 2026
Next Update: When market conditions or wash sale legislation changes

💰 Don't Let This Crash Go to Waste

Bitcoin is down 50%. Ethereum is down 51%. Every dollar of unrealized loss is a tax deduction waiting to be harvested. The no-wash-sale window may close. Act now.

✉️ davitchh@proton.me

Davit Cho — Crypto Tax Specialist & CEO at JejuPanaTek
13+ Years Experience | Patent #10-1998821 | IRS Compliance Expert