Tax season is on the horizon, and as 2025 comes to a close, it’s crucial for investors to reassess tax and accounting strategies that bolster their financial well-being. A minor adjustment in December can yield substantial advantages. With the rise in crypto investing among retail investors over recent years, it’s important not to overlook crypto tax reporting and associated tax strategies.
Similar to the stock market, crypto markets can swiftly experience downturns. Recently, the crypto market has faced a decline, prompting panic among investors. However, within this market uncertainty lies a valuable opportunity: investors can leverage these losses for tax loss harvesting — a method to help lower one’s taxable income by using unrealized losses to offset capital gains. While tax loss harvesting discussions are not new, the complexities involved with digital assets, along with the rapid changes in the crypto landscape and fragmentation across exchanges and wallets, make navigating this tax strategy more challenging.
For crypto investors contemplating tax loss harvesting, here are some important considerations and strategies to follow.
Assess Losses and Review Eligible Assets
Before beginning tax loss harvesting, having a clear view of all relevant digital asset accounts and wallets is essential. Investors should identify assets currently trading below their cost basis (the original purchase price plus any fees). This will help ascertain which digital assets can be sold to realize a loss that offsets capital gains or reduces taxable income.
Accurate account verification is critical; all cost bases must be correct. Errors can hinder the accurate measurement of gains and losses. Investors need not navigate this process alone, as there are tools available to assist in identifying which assets to sell and their respective values.
Liquidate the Assets
Once suitable assets are identified, investors should proceed to liquidate them, either converting them into cash or trading them for another cryptocurrency. It is during this sale that the loss for tax purposes is realized.
Reinvest Wisely
If you wish to maintain your portfolio composition, any sold digital asset can be repurchased immediately to stay aligned with long-term investment goals. Unlike stocks, there is no wash sale rule applicable to crypto, which means you do not have to wait to buy back the same asset post-sale.
Additional Considerations
While tax loss harvesting is beneficial for crypto traders, it generally offers the most advantages to high-income individuals. Those in higher tax brackets can offset their gains — which would be taxed at higher rates — using their realized losses.
Strategic Planning for 2026
As tax harvesting becomes critical before year-end, crypto traders should remain vigilant as tax season approaches. The IRS aims to standardize reporting for digital assets, and the tax filing process for 2025 will change compared to prior years. Investors will receive Form 1099-DA from crypto brokers, akin to the 1099-B forms for stocks, but must compute their own cost basis correctly. Keeping meticulous records of all crypto transactions is essential for a smooth tax season and unlocking better tax strategies. As the crypto market evolves from a less regulated space to a more structured one, accurate reporting is vital to optimize your tax circumstances year-round.
