Shehan Chandrasekera, head of tax strategy at CoinTracker, offered practical advice on how digital asset holders can optimize tax outcomes while meeting expectations for accurate reporting and documentation.
Tax Loss Harvesting
Tax loss harvesting allows investors to sell digital assets that have declined in value, realize a capital loss, and use that loss to offset capital gains from other investments. Chandrasekera described tax loss harvesting to Checkpoint as “one of the simplest levers you can pull to optimize your tax bill,” especially with cryptocurrencies, which are not subject to the so-called wash sale rule that applies to equities.
In traditional markets, the wash sale rule prevents investors from claiming a loss on a security if they repurchase the same or a substantially identical security within 30 days. In contrast, crypto investors can sell an asset at a loss and immediately buy it back, which makes tax loss harvesting more flexible in this asset class.
Chandrasekera cautions that the absence of the wash sale rule should not be viewed as a means to pursue unlimited tax benefits. “The absence of the wash sale rule isn’t a loophole to exploit; it’s a tool to use responsibly,” he said. He explained that transactions lacking economic substance — such as selling and rebuying within seconds solely for tax purposes — can be challenged by the IRS. “If you’re artificially manufacturing losses, the IRS could argue that your transaction lacks economic substance, and disallow the loss,” Chandrasekera said, emphasizing the need for genuine investment intent.
Also commonplace among investors is “the lack of visibility across wallets and exchanges.” He explained that when a taxpayer is “holding dozens of assets across multiple platforms, it’s easy to lose track of what’s actually in the Red. Without accurate, consolidated cost-basis data, investors often end up selling the wrong assets, triggering trades that don’t generate any tax benefit.”
Frequent movement of assets between self-custody wallets and exchanges often results in missing or incomplete cost basis information, making accurate reporting a challenge. “In traditional markets, brokers cover virtually all equity lots and maintain centralized records, which is not the case in crypto,” Chandrasekera explains. He urged investors to “take ownership of your data” and maintain meticulous records to support their tax positions.
Expectations for IRS Scrutiny
The introduction of Form 1099-DA, Digital Asset Proceeds from Broker Transactions, the IRS hopes, will bring greater transparency to crypto transactions and ensure that the agency receives accurate information about digital asset sales. Chandrasekera stressed the importance of aligning reported proceeds on tax returns with those reported on Form 1099-DA.
“The most important rule of thumb is simple: the proceeds you report on Form 8949 and Schedule D should at least match or be higher than what appears on your 1099-DA. If the IRS sees proceeds on a 1099-DA that don’t show up on your return — or show up in a smaller amount — you will most likely receive an IRS mismatch notice,” he said.
IRS notices or audits may be triggered by mismatches between Form 1099-DA and self-reported returns, incomplete or inconsistent information, or missing cost basis data. Chandrasekera said that robust crypto tax software should be able to ingest, compare, and reconcile Form 1099-DA data; flag discrepancies; and ensure tax forms are consistent with what the IRS receives.
“If your software can’t ingest, compare, and reconcile 1099-DA data, you are at risk of filing incomplete or inconsistent information. A good crypto tax software should consolidate activity across exchanges and wallets, flag discrepancies, and ensure your tax forms sync cleanly with what the IRS receives,” he explained.
Crypto investors face unique compliance challenges compared to traditional markets. In equities, brokers maintain centralized records and provide covered cost basis information, making tax reporting more straightforward. However, the decentralized nature of digital assets means investors must track their own cost basis, reconcile transactions across multiple platforms, and ensure all activity is accurately reported. Chandrasekera warned that missing “cost basis data is a common issue due to frequent transfers between platforms, making it crucial for investors to take ownership of your data.”
Chandrasekera predicts that the new IRS reporting regime will improve compliance among crypto holders. He cited IRS estimates that “roughly 75% of crypto holders have not been fully compliant,” and expects that standardized third-party reporting will drive more activity into the tax system and help close the tax gap over time. He added the IRS is prepared to process new digital asset reporting forms, and even if immediate enforcement is limited, once data is in the IRS system, discrepancies can be reviewed years later.
For more on tax loss treatment of digital assets, including cryptocurrencies, see Checkpoint’s Federal Tax Coordinator 2d ¶ I-2151.
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