With tax season approaching and 2025 only a few days left, investors should reconsider their tax and accounting strategies to support their overall financial health. In December, a small correction can lead to big gains. As investing in cryptocurrencies continues to gain traction among retail investors over the past few years, crypto tax reporting and the accompanying calculated tax strategies should not be overlooked.
Similar to the stock market, the cryptocurrency market can also experience downturns, but at a much faster pace. The cryptocurrency market has been experiencing a downturn recently, and investors are understandably panicking.
But within this broader market uncertainty lies a not-so-hidden opportunity. Investors may be able to use these losses to advantage in loss recovery, a strategy that helps individuals lower their taxable income. This allows investors to use loss positions to offset capital gains. While the discussion around year-end tax loss recovery is not new and is not unique to cryptocurrencies, the inherent complexity of digital assets, the rapid pace of movement of cryptocurrencies, and the fragmentation of exchanges, wallets, etc. has created further confusion about how best to approach this tax strategy.
If you are a crypto investor asking yourself how to approach cryptocurrency loss recovery, here are some important considerations and tips on how to proceed with loss recovery in the digital asset space.
Identify losses and identify harvestable assets
Before initiating loss recovery, it is essential to have visibility into all relevant digital asset accounts and wallets. Next, individuals should look for assets that are currently trading below their cost basis (the amount paid for the investment or asset plus fees). This step allows individuals to determine which digital assets they can sell to generate realized losses that offset capital gains or reduce taxable income.
When conducting a review, it is paramount to ensure that the accounting is accurate, meaning that any cost basis is accurate. All calculations are dependent on the accuracy of your account and a single error can limit your ability to properly measure your profit or loss.
Investors should not feel alone in navigating the identification process. Some tools can help you identify which assets to sell and for how much.
sell assets
Once the asset is identified, the investor must liquidate the asset by converting it to cash or exchanging it to another cryptocurrency. Tax loss recovery is realized here, as the sale that occurs activates the tax loss.
Reinvest with confidence
If you want to maintain the composition of your portfolio, you can buy digital assets as soon as they are sold to keep your long-term investment plans on track. Unlike stocks, cryptocurrencies do not have wash sale rules. This means there is no waiting period to buy back the same asset after a sale.
However, it is not a loophole that generates false losses by continuously selling underwater crypto assets and immediately buying them back (a transaction with no economic substance).
Additional considerations
While tax loss recovery is beneficial for crypto traders, keep in mind that it generally benefits high-income individuals the most. People in higher tax brackets are able to offset gains that would otherwise be taxed at a higher rate with realized losses.
A smarter approach to crypto tax filing
Cryptography is inherently complex because it is decentralized. This complexity can paralyze investors. The fear of doing the wrong thing often prevents us from taking any action at all. While this is an understandable situation, investors should be aware that the tax loss recovery strategy can be completed any time the market value of the asset falls below its original purchase price, known as its cost basis. Additionally, year-end tax audits can prompt you to revalue your assets and make strategic tax decisions. Both of these points are now converging, making it a particularly opportune time to reconsider tax loss recovery and enter 2026 on a more confident fiscal footing.
Looking to 2026
While collecting taxes should be a top priority before the end of the year, crypto traders need to be vigilant as tax season approaches. Your 2025 tax return will look different than previous years, as the IRS and government agencies aim to standardize digital asset reporting. Investors receive a Form 1099-DA from their cryptocurrency broker, similar to the Form 1099-B they receive for stocks. Brokers are not currently required to perform cost-based calculations, so investors should be aware of costly blind spots, but individuals must report this information on their tax returns. Although the crypto intermediary will provide the form, the investor is responsible for correctly calculating the cost basis, holding period, and actual profit or loss.
Tracking cryptocurrency activity is critical to ensuring a smooth tax season and provides features that allow for smarter tax strategies. As cryptocurrencies move from the Wild West to a more regulated asset class, accurate reporting is key to optimizing your tax position throughout the year and avoiding stranded funds due to missed losses or misclassified transactions.
