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Does the Wash Sale Rule Apply to Crypto?

Tynisa (Ty) Gaines
ByTynisa (Ty) Gaines, EA Reviewed byArthur Teller, CPAUpdated on December 15, 2022 · minute read

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  • The wash sale rule prohibits selling securities at a loss and reacquiring them within 30 days.

  • Because crypto is not a security, there is no crypto-specific wash sale rule. However, legislators are actively working to close this loophole. 

  • There are safer strategies to reduce tax liability than crypto wash sales, such as waiting the required 30-day period, or trading the depreciated asset for a coin with a closely correlated price, waiting more than 30 days, and then repurchasing the original asset.

What is the wash sale rule?

As of 2023, the crypto wash sale rule remains a gray area. However, it is safer to avoid crypto wash sales.  

In accordance with 26 U.S. Code § 1091 - Loss from wash sales of stock or securities, securities - investments such as stocks and bonds - are subject to the wash sale rule. 

This means that if an investment you hold has lost value, you cannot sell it to claim losses and buy it back within 30 days as prices bottom out. This rule prevents taxpayers from using "artificial" losses to offset their gains and lower their capital gains tax liability.

Crypto wash sale example

  • On December 30, Aaron has $15,000 of gains and $5,000 of losses, for an overall gain of $10,000. He is also holding 20 BNB that has a cost basis of $10,000 but a current fair market value of $4,000. 

  • Aaron sells 20 BNB for $4,000, realizing a capital loss of $6,000. 

  • On January 5, Aaron buys 20 BNB for $4,200. 

  • On his taxes, Aaron reports the $6,000 loss on 20 BNB and uses it to offset capital gains, lowering his overall gains from $10,000 to $4,000. 

Does the wash sale rule carry over into the next year?

Yes. If you sell the asset and reacquire it within 30 days, this is considered a crypto wash sale, whether or not the sale carries over into the next calendar year. 

Reduce your taxes with the crypto wash sale rule?

The IRS' wash sale rule does not currently apply to cryptocurrency because it considers virtual currencies to be property rather than securities. This creates a loophole in which crypto is able to escape the wash sale rule. 

This means that, technically speaking, crypto wash sales are allowed. However, lawmakers and regulators have suggested that this could soon change. 

In September of 2021, a House Ways and Means Committee proposal included language applying wash sale rules to digital assets. Although the Build Back Better bill stalled in Congress, these developments underlined the government's interest in the matter.

Biden Biden conceded in 2021 that the Build Back Better Act would not be passed by the end of the year, but he remained steadfast in his intent to pass it as soon as possible.  In March of 2022 he signed the bill into effect, calling for federal agencies to  pay closer attention to crypto wash sales.

This series of events demonstrates that federal agencies are acting quickly to change the legislation surrounding wash sales of crypto. Our advice? Use your best judgment with regards to the ever-evolving field of cryptocurrency - especially with wash sale regulations. When in doubt, play it safe.

How does the wash sale rule impact my tax bill?

The aim of a crypto wash sale is to minimize tax liability by reducing capital gains. Through wash sales, you could pay less in taxes.

Safer ways to harvest crypto losses

There are safer strategies that are effective in accomplishing this same goal:

  1. If you rebuy a crypto asset after the 30 day period passes, your actions no longer classify as wash sale trading.

  2. You may trade the depreciated asset for a coin with which its price is closely correlated. You would then hold that correlated coin for more than 30 days, and then repurchase the original asset.

Safer tax loss harvesting example

Because Uniswap is an Ethereum-based DeFi exchange and the DeFi Pulse Index coin is pegged to 10 of the top-performing Etherum DeFi coins, $UNI and $DPI are closely correlated; over the past year their correlation has been 89%. 

Rather than completing a wash sale, if you wanted to tax loss harvest with your UNI, you could sell it at a loss, purchase the same amount of DPI, and hold the DPI until the wash sale period passes, at which point you could repurchase UNI. 

For more information on safe crypto tax loss harvesting, visit TokenTax’s page on How to Report Crypto Losses on your Taxes.

How can I manage my crypto taxes?

With specific attention to the tax regulations in your country, TokenTax software calculates capital gains totals using various crypto accounting methods (including FIFO, LIFO, HIFO, the average cost method, or TokenTax’s proprietary Minimization), allowing you to reduce your tax liability. 

If you would like to speak to our team about choosing a plan that is right for you, please contact us at [email protected]

To learn more about TokenTax or to sign up, visit: https://tokentax.co/pricing

Frequently Asked Questions

Can you still do wash sales with crypto?

Technically, yes. However, the Biden administration has begun to investigate crypto cases more closely, and it is likely that the loophole that currently allows crypto wash sales will soon be closed, making crypto wash sales illegal.

How can I tell which one of my assets is currently trading at a loss? 

The only way you can see your overall portfolio performance is by tracking all of your crypto profits and losses.

TokenTax software helps you:

  • Track both realized and unrealized profits and losses

  • Minimize your tax liability by calculating capital gains totals using a variety of crypto accounting methods

  • Identify tax loss harvesting opportunities

  • Identify capital gains offset opportunities

If you would like to speak to our team about choosing a plan that is right for you, please contact us at [email protected]

To learn more about TokenTax or to sign up, visit: https://tokentax.co/pricing

Will the Wash Sale Rule for Crypto Change in the Future?

Given recent rulings on crypto cases and the Build Back Better Act (signed into effect in March of 2022), it is reasonable to expect that crypto wash sales will soon be declared illegal.

To stay up to date on the latest, follow TokenTax on Twitter @tokentax.

Related Content

Tynisa (Ty) Gaines
Tynisa (Ty) GainesProject Manager at TokenTax
Tynisa (Ty) Gaines, EA has more than 20 years of experience as a tax professional. Ty has published numerous tax articles, two tax e-books, and an academic publication on cryptocurrency for the National Income Tax Workbook.
Arthur Teller
Reviewed byArthur TellerCOO at TokenTax
Arthur came to TokenTax after 12 years at KPMG. A specialist in partnership taxation and enterprise tax software, he is a licensed CPA in both California and Illinois and a member of the AICPA.

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