Crypto Slump Offers a Silver Lining for Investors: The Tax-Loss Harvest

With the 2025 tax year closing in under ten days, a recent downturn in cryptocurrency markets has created a timely opportunity for savvy investors. According to a Dec. 22 analysis from CoinDesk, these market losses can be strategically used to lower an individual’s taxable income through a process known as tax-loss harvesting.

The strategy allows investors to sell assets trading below their purchase price, or cost basis, to generate a “realized loss.” This loss can then be used to offset capital gains from other investments, ultimately reducing the amount of income subject to tax. For high-income individuals in higher tax brackets, the benefits can be substantial.

How It Works: A Three-Step Process

• **1. Identify Losses:** Review all digital asset accounts and wallets to pinpoint assets currently valued below their cost basis. Accuracy is critical, as all subsequent calculations depend on a correct cost basis.
• **2. Sell the Assets:** Liquidate the identified assets by either converting them to cash or swapping them for another cryptocurrency. This sale is the action that formally realizes the loss for tax purposes.
• **3. Reinvest Confidently:** Unlike stocks, crypto is not currently subject to the “wash sale” rule. This means investors can sell an asset to harvest a loss and immediately buy it back to maintain their long-term portfolio composition.

However, the author cautions that this is not a loophole for generating artificial losses. Transactions with no genuine economic substance could draw scrutiny.

Regulatory Shift: What to Expect for the 2025 Filing Season

The upcoming tax season marks a significant change in digital asset reporting. For the first time, investors will receive a Form 1099-DA from their crypto brokers, similar to the 1099-B forms used for stocks. Despite this new requirement, a crucial responsibility remains with the investor.

Brokers are not yet required to calculate the cost basis on these forms. Individuals must still track this information themselves to correctly compute their capital gains and losses. Meticulous record-keeping is no longer optional; it's essential for optimizing one's tax position and avoiding errors.