How to use ETH ETFs for tax-loss harvesting? (Tax strategy)

Tax-Loss Harvesting Mechanics with ETH ETFs

1. Investors can sell ETH ETF shares at a loss when market prices decline below their cost basis, locking in realized capital losses.

2. These losses offset capital gains from other crypto or traditional asset sales within the same tax year.

3. If total losses exceed gains, up to $3,000 of the excess may be deducted against ordinary income on U.S. federal returns.

4. Remaining unused losses carry forward indefinitely to future tax years.

5. The IRS treats ETH ETFs as securities, not digital assets directly—so wash sale rules apply strictly to identical ETF tickers.

Wash Sale Rule Implications

1. Purchasing the same ETH ETF—or a “substantially identical” fund—within 30 days before or after the sale triggers a wash sale disallowance.

2. Losses from such transactions are disallowed and added to the cost basis of the replacement shares.

3. Identical ticker symbols like ETHW, ETHA, or CETH are treated as substantially identical by most tax software and auditors.

4. Switching between spot-based ETH ETFs and futures-based ETH ETFs does not automatically avoid wash sale treatment—the underlying exposure and structure matter more than label differences.

5. Holding periods reset upon repurchase, affecting whether gains or losses qualify as short-term or long-term for tax rate purposes.

Cost Basis Tracking Requirements

1. Each purchase of an ETH ETF must be tracked separately using methods like FIFO, LIFO, or specific identification.

2. Specific identification allows investors to choose which lots to sell, maximizing loss realization while preserving higher-basis shares.

3. Brokerage statements rarely auto-calculate optimal lot selection; manual tracking or third-party tools like CoinTracker or TokenTax are often necessary.

4. Dividend reinvestments, fee deductions, and currency conversion costs must be included in per-share cost basis calculations.

5. Inconsistent recordkeeping increases audit risk, especially when multiple ETFs with overlapping strategies are held simultaneously.

State Tax Variations

1. California taxes all capital gains without deduction limits, disallowing the $3,000 ordinary income offset available federally.

2. New Hampshire and Tennessee previously taxed investment income but eliminated those taxes effective 2023 and 2025 respectively.

3. Pennsylvania excludes capital gains from its personal income tax base, making ETH ETF losses irrelevant for state-level harvesting there.

4. New York City imposes an additional unincorporated business tax on certain trading activities involving ETFs held in business accounts.

5. Foreign investors subject to U.S. estate or gift tax rules face different loss utilization thresholds when holding ETH ETFs through U.S.-based custodians.

Frequently Asked Questions

Q: Can I harvest losses across different ETH ETFs like ETHW and CETH in the same 30-day window?A: Yes—if they are not deemed substantially identical by the IRS or your tax preparer. However, most major spot ETH ETFs share nearly identical holdings, underlying index methodology, and issuer structures, increasing the likelihood of wash sale treatment.

Q: Do dividends from ETH ETFs affect my ability to claim a loss?A: Yes. Reinvested dividends increase cost basis. Failing to account for them results in overstated losses and potential underreporting penalties.

Q: Is tax-loss harvesting possible in a Roth IRA holding ETH ETFs?A: No. Realized losses inside tax-advantaged accounts like Roth IRAs have no immediate tax benefit since gains and losses are not reported annually to the IRS.

Q: What happens if I sell ETH ETF shares and buy ETH directly instead?A: That avoids the wash sale rule entirely, as ETH tokens and ETH ETFs are not considered substantially identical securities under current IRS guidance—but direct ETH ownership introduces separate reporting obligations under Form 8949 and Schedule D.