Tax season is approaching, and with 2025 just weeks away, investors now need to review their tax and accounting strategies that support their overall financial health. In December, a slight adjustment can mean big profits. As crypto investing has continued to gain traction among retail investors over the past few years, crypto tax reporting and the calculated tax strategies that come with it should not be overlooked.
Much like the stock market, cryptocurrency markets can experience downturns, but at a much faster pace. Recently, crypto markets have seen a crash, which naturally causes investors to panic.
Yet amid this broader market uncertainty lies a not-so-hidden opportunity: Investors may be able to use these losses to their advantage through tax-loss harvesting – a strategy aimed at supporting the reduction of an individual’s taxable income. It allows investors to use losing positions to offset capital gains. While the debate over year-end tax-loss harvesting is not new or unique to crypto, the inherent complexities of digital assets, the rapid pace of crypto movement, and the fragmentation across exchanges, wallets, and more. add a layer of confusion about how best to approach this tax strategy.
If you are a crypto investor wondering how to approach crypto tax-loss harvesting, below are key considerations and tips on how to handle tax-loss harvesting in digital assets.
Identify your losses and review harvestable assets
Before you begin tax-loss harvesting, it is essential to have visibility into all relevant accounts and digital asset portfolios. Next, individuals should look for assets that are currently trading at a price below cost basis (the amount paid for an investment or asset, plus any fees). During this step, an individual can determine which digital assets they can sell to generate a realized loss that offsets capital gains or reduces taxable income.
During a review it is of utmost importance to ensure that the accounts are accurate, i.e. all cost bases are correct. All calculations depend on the accuracy of the accounts, and a single error can limit the ability to correctly measure gains and losses.
Investors should not feel alone in the identification process; certain tools can help identify which assets to sell and at what price.
Sell the assets
Once assets are identified, investors must act to liquidate them either by converting them to cash or exchanging them for another cryptocurrency. This is where tax loss harvesting will occur, as the sale that takes place is what activates the loss for tax purposes.
Reinvest with confidence
If you want to maintain portfolio composition, any digital assets sold can be purchased immediately to keep long-term investment plans on track. Unlike stocks, cryptocurrencies do not have a wash sale rule, meaning there is no waiting period to repurchase the same asset after it is sold.
That said, this is not a loophole to generate false losses by constantly selling underwater crypto assets and immediately buying them back (transactions without economic substance).
Additional consideration
Tax-loss harvesting can be useful for crypto traders, but keep in mind that it typically benefits high-income earners the most. Those in higher tax brackets can offset gains that would otherwise be taxed at higher rates, against the losses they realize.
A smarter approach to cryptocurrency tax reporting
Crypto is inherently complex due to its decentralization. This complexity can leave investors paralyzed: the fear of making a bad choice often leads to doing nothing at all. This is an understandable situation, but investors should be aware that a tax-loss harvesting strategy can be implemented at any time when the market value of your asset falls below the original purchase price, called its cost basis. Additionally, the year-end tax review can be a trigger to revaluate assets and make strategic tax decisions. These two points are currently converging, making it a particularly opportune time to review tax-loss harvesting and approach 2026 on a more confident financial footing.
Thinking ahead to 2026
Although tax collection should be a priority before the end of the year, crypto traders need to be vigilant as we enter tax season. The IRS and government agencies are seeking to standardize the reporting of digital assets, and the 2025 tax return will look different from previous years. Investors will receive Form 1099-DA from crypto brokers, similar to the 1099-B forms they receive for stocks. Investors should be aware of costly blind spots because brokers are currently not required to calculate cost basis, but individuals are required to report this information on their own tax returns. Although crypto brokerage firms provide the forms, investors are responsible for correctly calculating their cost basis, holding period, and actual gains/losses.
Tracking crypto activity will carry considerable weight in ensuring a smooth tax season and provide the opportunity to unlock smarter tax strategies. As crypto transitions from the Wild West to a more regulated asset class, accurate reporting is essential to optimize your tax situation throughout the year and avoid leaving money on the table due to overlooked losses or misclassified transactions.
