The Current State of the Cryptocurrency Market

The virtual currency market is experiencing a downturn.

Bitcoin, the largest cryptocurrency globally, saw a 6% drop during trading on Monday, marking its most significant single-day fall since March. While it has seen a bit of a rebound and is currently priced around $93,000, it remains approximately 25% below its peak of about $125,000 reached in October.

Other major cryptocurrencies, like Ether and Solana, have also recorded declines recently and, similar to Bitcoin, have shown negative returns over the past year.

Despite the gloomy outlook, some experts suggest there may be a silver lining for crypto investors. The Internal Revenue Service permits the use of losses from sold investments to counterbalance investment gains and reduce taxable income.

However, the guidelines surrounding this can get quite complicated, particularly with cryptocurrencies, so it’s advisable to seek the expertise of a financial advisor or tax professional before altering your portfolio.

Miklos Ringbauer, a certified public accountant and founder of MiklosCPA, suggests that investors should consider leveraging short-term losses before the year ends. “Reducing your taxable income is beneficial,” he asserts. “Cryptocurrencies are in a unique situation.”

This uniqueness stems from the fact that, at least for the time being, certain regulations applicable to traditional assets like stocks do not extend to digital currencies. Here’s some essential information on the topic:

Understanding Loss Recovery Basics

A quick overview of how tax loss recovery works: because investment values fluctuate, it’s usually not impactful for taxes while an asset stays in your portfolio.

If you sell an asset, however, it becomes taxable. If the selling price exceeds what you initially paid, you make a profit, which could be subject to capital gains tax. Short-term gains—those from investments held for less than a year—are taxed as ordinary income. In contrast, longer-term holdings benefit from more favorable tax rates that can range from 0% to 28%, based on income and investment type.

On the flip side, if you sell your investment for less than its purchase price, you realize a loss. The IRS permits you to use these losses to lessen the tax burden on any gains you’ve made.

Initially, offsets need to correspond: short-term losses offset short-term gains and long-term losses do the same for long-term gains. Any excess losses can offset gains of the opposite type.

If losses still exceed gains, you can apply up to $3,000 of your net losses to nullify ordinary taxable income. Additional losses beyond this can be carried forward indefinitely to future years.

Recognizing a loss establishes it for the year it occurs; thus, it must be recorded for the 2025 tax year before December 31. If you can carry losses into future years, “capturing” them becomes a strategic move, according to Marianela Collado, a certified public accountant and CEO of Tobias Financial Advisors. “You’re taking advantage of a brief opportunity,” she suggests. “Today’s loss allows flexibility if you need to sell an appreciated investment later.”

In essence, recognizing a current loss gives you the chance to offset future tax payments. “Paying as little tax as possible today is key,” Corrado notes. “That money is better off in my pocket than going to the IRS.”

Recovering Cryptocurrency Asset Losses

Determining profit or loss within cryptocurrency investments can be trickier than traditional assets. For instance, exchanging one virtual currency for another could result in a profit or loss. If your cryptocurrency portfolio is complex, it may be wise to consult with a tax expert.

In a more straightforward scenario, say you invest $2,000 into cryptocurrency and its value drops to $1,000. If your intent is to hold long-term, expecting recovery to $2,000 or maybe even rise to $10,000, you wouldn’t recognize a loss if you hold on until it gets back to $2,000.

However, if you sell when it’s down to $1,000 and buy it back right away, you can “harvest” that loss of $1,000, using it to offset gains in other parts of your portfolio.

It’s important to note that traditional stocks, mutual funds, or ETFs have limitations due to “wash sale” rules, which typically require a 30-day waiting period before repurchasing similar investments. This rule doesn’t apply to cryptocurrencies, which are categorized as assets instead of securities for tax reasons.

“You can bank your losses and buy back immediately,” Corrado emphasizes. “That’s a distinctive feature of cryptocurrencies.”

Stay Aware of Evolving Tax Rules

Yet, Ringbauer expresses concern that the IRS may take actions to eliminate some tax loopholes in the future.

“It’s likely that cryptocurrencies will eventually be regulated like stocks,” he suggests. Thus, consulting with your tax professional might lead you to play it safe and consider waiting 30 days before making repurchases.

While changes may not be applied retroactively, the IRS might enact the “essence over form” doctrine, implying tax liability could exist even if the action was solely taken to avoid taxes.

Whether or not you take these steps, Ringbauer insists that a strategy for recovering losses is crucial for investors facing declines in cryptocurrency values. “Money you actually have is far more valuable than unrealized gains and losses,” he explains. “Factoring in current losses aids in making informed decisions rather than merely facing an unexpected tax bill. This is basic tax planning.”