The virtual currency market is in a bit of a slump.
Bitcoin, the world’s largest cryptocurrency, fell 6% in trading on Monday, its biggest single-day decline since March. It has since rebounded somewhat, and the digital currency is now priced at about $93,000, but it is still down about 25% from its all-time high of about $125,000 in October.
Other prominent digital currencies such as Ether and Solana have also fallen recently and, like Bitcoin, have recorded negative returns over the past 12 months.
For crypto investors under a dark cloud, some experts say there may be a silver lining. The Internal Revenue Service allows you to use losses from sold investments to offset investment gains and taxable income.
The rules around this move can be complicated, especially when it involves cryptocurrencies, so it’s wise to consult your financial advisor or tax professional before making any changes to your portfolio.
But for prudent investors, taking advantage of short-term losses is worth considering before the end of the year, says Miklos Ringbauer, a certified public accountant and founder of the accounting firm MiklosCPA.
“Anytime you can reduce your taxable income, it’s beneficial,” he says. “And cryptocurrencies are in a unique position.”
That’s because, at least for now, certain rules that apply to traditional assets like stocks and mutual funds do not apply to digital currencies. Here’s what you need to know:
Basics of loss recovery
Here is a basic overview of how tax loss recovery works. Because the value of an investment always fluctuates, it usually doesn’t make much sense for taxes as long as it remains in your portfolio.
However, if you sell something you own, it will be taxable. If you sell it for more than the price you paid, you make a profit. This means you will pay capital gains tax on the difference. Gains from investments lasting less than a year, known as short-term capital gains, are taxed as ordinary income. Gains from investments held for long periods of time are taxed at more favorable long-term capital gains tax rates ranging from 0% to 28%, depending on income and type of investment.
If you sell your investment for less than what you paid for it, you have incurred a loss. Here, the IRS allows you to use your losses to offset the taxes owed on your gains.
Initially, the offsets should be similar. Short-term losses offset short-term gains, and long-term losses offset long-term gains. Excess losses can then be used to offset gains of the opposite kind.
Then, if your losses still exceed your gains, you can use up to $3,000 of your net losses to offset your ordinary taxable income.
Any additional money on the negative side of the ledger can be carried forward indefinitely to the next year.
If you recognize a loss, the loss is fixed in the year in which it occurs, so you must record the loss for the 2025 tax year by December 31. And if you’re in a position to carry losses forward into future tax years, it’s easy to see why “capturing” them is a wise move, says Marianela Collado, a certified public accountant, certified financial planner, and CEO of Tobias Financial Advisors.
“Essentially, you’re taking advantage of a fleeting opportunity,” she says. “You’re taking losses today, and if you have to[sell valuable investments]to raise cash in the future, you’re putting losses in the bank for years.”
In other words, if you have a loss now, recognizing it gives you the flexibility to offset any taxes you might pay at some point in the future.
“One of the rules for success is to pay as little tax as possible today,” Corrado says. “That money is better in my pocket than in Uncle Sam’s.”
Recover crypto asset losses
The components of profit or loss in cryptocurrency investments can be more complex than in traditional assets such as stocks and bonds. For example, when you exchange one virtual currency for another virtual currency, you may incur a profit or loss. If you have a complex cryptocurrency portfolio, we recommend consulting with a tax accountant.
In a simpler scenario, let’s say you buy $2,000 worth of cryptocurrency and the price drops to $1,000. You plan to hold it for the long term and expect it to eventually recover to $2,000 and even rise to $10,000.
If you hold out as the price drops to $1,000 and then returns to $2,000, you have no profit or loss. However, if you sell for $1,000 and immediately buy the holding, you end up with the same return, but you can “harvest” the $1,000 loss and offset the gain with other parts of your portfolio.
Stocks, mutual funds, exchange-traded funds (even funds that hold cryptocurrencies), etc. cannot do exactly that. “Wash sale” rules typically require you to wait 30 days before reinvesting in anything you sell or buying investments that the IRS deems “substantially identical.”
This means you can’t sell or buy back shares of the same stock, and you can’t sell a fund that tracks the S&P 500 and reinvest in another fund that tracks the same index.
This rule does not apply to cryptocurrencies, which are treated as assets rather than securities for tax purposes.
“You can bank your losses and buy them back right away,” Corrado said. “That’s one of the unique aspects of cryptocurrencies.”
Keep an eye on the evolving rules
But Ringbauer believes the IRS and lawmakers may take steps to close some of the tax loopholes in the future.
“The safest answer is that it will probably be classified the same as stocks at some point,” Ringbauer said.
So you and your tax professional could err on the side of caution and decide to wait 30 days to buy something back, he says. Even if the rules change, he said, it’s unlikely to apply retroactively, but the IRS could still invoke the so-called “substance over form” doctrine, the gist of which is that you still owe taxes even if you took action solely to avoid taxes and not for a legitimate purpose.
If the IRS ultimately tries to change the rules, he says, “the big question is, do I deserve to be subject to an IRS audit or trial?”
Regardless of how you approach it, Ringbauer says it’s a worthwhile strategy for investors who are losing money in cryptocurrencies to recover as much of their losses as possible.
“Money in our pockets is always worth more than unrealized gains and losses,” he says. “Including existing losses in your portfolio allows you to make more educated choices rather than just getting hit with a tax bill. This is tax planning 101.”
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