Tax Planning After Bitcoin's $740M Liquidation Day

On February 5, 2026, Bitcoin registered a -6.05 sigma move on the rate-of-change Z-score. To put that in perspective: it was faster than the FTX collapse (-4.07σ) and surpassed only by the COVID crash (-9.15σ). Within 24 hours, $740 million in crypto positions were liquidated. Bitcoin fell from $90,000 to $60,033 over two weeks, a 52% decline from its October 2025 all-time high.

If you held through this, you're probably feeling a mix of conviction and concern. If you sold, you're sitting on realized losses that could become valuable tax assets. Either way, the 2026 tax landscape for Bitcoin has shifted dramatically, and the planning decisions you make now will matter more than usual.

What Actually Happened in February 2026

The crash wasn't random. Multiple catalysts collided in an unfortunately synchronized way.

A partial government shutdown from January 30 to February 3 delayed economic data, creating uncertainty. On February 5, Treasury Secretary Bessent testified before Congress that he had "no authority to stabilize crypto markets," which spooked institutional holders. The next day, China banned yuan-pegged stablecoins.

The result was $159.3 billion in total liquidations across crypto markets from late January through mid-February. The $740 million single-day event included $287 million in Bitcoin long positions and $267 million in Ethereum long positions.

Bitcoin is now trading -2.88σ below its 200-day moving average, a level not observed in the past decade, including during COVID or the FTX collapse. That's the 0.0th percentile of historical observations.

The New Tax Reporting Reality

If you've been treating crypto taxes as something you figure out in April, 2026 marks the end of that approach.

Form 1099-DA is now live. Brokers began reporting gross proceeds for transactions starting January 1, 2025, and as of January 1, 2026, they're also reporting cost basis information. The IRS is offering transition relief (no penalties for good-faith compliance efforts through 2026), but the infrastructure is clearly being built for comprehensive enforcement.

There's an important nuance here: the Trump Administration nullified Biden-era DeFi broker reporting regulations in April 2025. Public Law 119-5 narrowed broker obligations to custodial transactions and entities like cryptocurrency ATMs. So if you're self-custodying and using decentralized exchanges, you won't receive 1099-DAs, but you're still responsible for accurate reporting.

This creates an asymmetry worth understanding. Exchange users will have their transactions reported automatically. Self-custody users won't, but face the same tax obligations with higher documentation burdens. Neither approach is inherently better; they just require different levels of personal record-keeping.

Tax-Loss Harvesting: The Silver Lining

Here's where the February crash creates genuine opportunity.

Cryptocurrency does not fall under wash-sale rules that restrict securities trading. This means you can sell Bitcoin at a loss and immediately repurchase it without triggering wash-sale disqualification. The loss is realized and deductible; your position remains essentially unchanged.

If you bought Bitcoin at $100,000 and sold during the crash at $65,000, you have a $35,000 loss you can harvest. You can repurchase immediately, and that loss offsets capital gains elsewhere in your portfolio (or up to $3,000 of ordinary income annually, with the remainder carrying forward).

This is unusually powerful compared to stock market tax-loss harvesting, where you'd need to wait 31 days or buy a "substantially different" security.

The counterargument: this may not last. The Treasury Department's August 2025 White Paper proposed treating cryptocurrency as a distinct asset class with mark-to-market elections and securities lending rules. If legislation passes in 2026 (likely, given the administration's stated priorities), wash-sale rules may extend to crypto. The window for this strategy could be closing.

Cost Basis: The Documentation Problem

The IRS requires you to track four things for every transaction: purchase date, acquisition cost in USD, fair market value at time of sale, and units sold. Documentation failures risk audits and penalties.

This sounds straightforward until you consider reality. You bought some Bitcoin on Coinbase in 2021, moved it to cold storage, bought more through a different exchange in 2022, received some from a friend, earned some through staking, and maybe made a few Lightning transactions along the way. Now you need to reconstruct which specific units you sold.

You have choices in cost basis methods: FIFO (first-in, first-out), LIFO (last-in, first-out), or specific identification. Each produces different tax outcomes. FIFO typically means selling your oldest, lowest-cost-basis coins first (higher gains). LIFO means selling your most recent purchases (potentially lower gains if you bought recently at higher prices). Specific identification gives you maximum flexibility but requires meticulous records.

For anyone with transaction history across multiple wallets, exchanges, or years of activity, this is where tools like Bitment become genuinely useful. Bitcoin-focused accounting software can organize transactions and generate tax-ready reports, transforming hours of spreadsheet work into structured documentation. Whether you're doing monthly DCA, occasional larger purchases, or Lightning transactions, clean records make tax compliance straightforward and audit-ready.

What's Coming in 2026

The legislative landscape is shifting in ways that matter for planning.

Revenue Procedure 2025-31 provides a safe harbor allowing grantor trusts to stake digital assets without impacting their pass-through tax status. If you're holding Bitcoin in trust structures, this removes a key uncertainty.

The larger question is whether the Treasury's White Paper proposals become law. The administration wants to treat cryptocurrency as a distinct asset class with mark-to-market elections, securities lending rules, and a trading safe harbor. This would fundamentally change how crypto is taxed, potentially requiring you to recognize gains and losses annually regardless of whether you sell.

This isn't necessarily bad. Mark-to-market elections could simplify reporting and let you deduct unrealized losses. But it would eliminate the ability to defer gains indefinitely by simply not selling.

PwC's 2026 Global Crypto Tax Report highlights that 58 jurisdictions are taking increasingly different approaches. Cross-border reporting obligations are expanding. If you have any international exposure, professional advice is becoming less optional.

Practical Steps to Take Now

First, document your February 2026 transactions carefully. If you sold during the crash, record the exact dates, amounts, and prices. If you're harvesting losses, make sure you have clean records of both the sale and any repurchase.

Second, review your cost basis method. If you've been using FIFO by default, consider whether specific identification might produce better outcomes. This is especially relevant if you have lots with significantly different cost bases.

Third, get your historical records in order before 1099-DAs create discrepancies. If your exchange reports don't match your actual situation (because you transferred coins in or out, for example), you'll need documentation to explain the difference.

Fourth, watch the legislative calendar. If mark-to-market rules are coming, you may want to realize certain gains or losses before year-end while current rules apply.

The Bigger Picture

Bitcoin's February crash was severe but not unprecedented. What's genuinely new is the regulatory infrastructure being built around crypto taxation. The IRS is getting better at tracking digital assets. The reporting requirements are tightening. The days of treating crypto as a gray area are ending.

This isn't necessarily a threat. Clear rules, even strict ones, provide certainty. Investors who maintain clean records and plan proactively will face far fewer problems than those who wing it.

The $740 million liquidation day created real losses for many holders. For those who understand the tax code, it also created opportunities. The difference between the two often comes down to documentation and timing, things you can control.