The tax season is upon us, and with a small fraction of 2025 remaining, investors should reassess their tax and accounting strategies to enhance their financial wellness. A minor adjustment in December can yield considerable advantages. As cryptocurrency investments continue to attract retail investors, accurate tax reporting and strategic tax approaches must not be disregarded.
Similarly to the stock market, the crypto market can undergo swift downturns. Recently, the crypto markets have faced a decline, inciting anxiety among investors.
Nevertheless, amid this market volatility lies an important opportunity: investors can leverage these losses for tax loss harvesting—an approach designed to reduce an individual’s taxable income. This strategy enables investors to use losing positions to diminish capital gains. Although the concept of tax loss harvesting at the end of the year is not new to crypto, the complexities of digital assets, the rapid fluctuations in crypto values, and the diversity across exchanges and wallets complicate the execution of this tax strategy.
If you’re a cryptocurrency investor contemplating how to engage in tax loss harvesting, here are essential guidelines and advice to successfully navigate this process within the digital asset space.
Identify your losses and review harvestable assets
Before initiating tax loss harvesting, it’s crucial to have a clear view of all pertinent digital asset accounts and wallets. Following this, individuals ought to search for assets currently trading below their cost basis (the price paid for an investment or asset, including any fees). In this phase, individuals can ascertain which digital assets to sell to create a realized loss that offsets current capital gains or reduces taxable income.
During the review process, it’s vital to ensure accounts are correctly recorded, meaning all cost basis values need to be accurate. Every calculation relies on precise accounts, and even a single mistake can hinder the ability to accurately assess gains and losses.
Investors don’t have to navigate the identification process alone; various tools are available to help determine which assets to sell and their respective values.
Sell the assets
After identifying the assets, investors should proceed to liquidate them by converting them to cash or swapping them for another cryptocurrency. This is where tax loss harvesting takes effect, as the sale triggers the loss for taxation purposes.
Reinvest confidently
If an investor wishes to maintain their portfolio’s makeup, any sold digital asset can be repurchased immediately to keep long-term investment strategies intact. Unlike stocks, cryptocurrency lacks a wash sales rule, meaning there is no mandatory waiting period to reacquire the same asset post-sale.
However, this should not be misconstrued as a loophole for creating artificial losses by repeatedly selling depreciating cryptocurrency assets and promptly buying them back (transactions lacking real economic substance).
Additional consideration
Tax loss harvesting can be advantageous for crypto traders, yet it predominantly benefits higher-income individuals. Those in elevated tax brackets can utilize realized losses to offset gains that would otherwise incur taxation at higher rates.
Smarter approach to crypto tax reporting
Given its inherent complexity stemming from decentralization, crypto can leave investors at a standstill: the fear of making errors often leads to inaction. This is a common plight, but investors should recognize that a tax loss harvesting strategy can be executed whenever the market value of an asset falls below its original purchase price, known as its cost basis. Additionally, a year-end tax review can serve as a prompt to evaluate assets and make strategic tax choices. These factors currently converge, presenting a perfect opportunity to revisit tax-loss harvesting and step into 2026 with greater financial assurance.
Thinking ahead for 2026
While tax harvesting should be at the forefront as the year concludes, crypto traders must stay vigilant as we enter tax season. The IRS and governmental bodies aim to standardize digital asset reporting, resulting in the 2025 tax filing differing from prior years. Investors will receive Form 1099-DA from crypto brokers, akin to the 1099-B forms typically associated with stocks. It is crucial for investors to be mindful of costly oversights, as brokers currently do not need to calculate cost basis, but individuals must report this information in their tax submissions. While crypto brokerages will issue the forms, investors bear the responsibility of accurately computing their cost basis, holding period, and actual gains/losses.
Meticulous monitoring of crypto transactions will play a significant role in ensuring a seamless tax season and provides an avenue to unlock smarter tax strategies. As cryptocurrency transitions from being unregulated to a more structured asset class, precise reporting is essential to optimizing tax positions throughout the year and preventing potential loss of funds due to overlooked losses or misclassified transactions.
