Crypto Wash Sale Rule: 2024 IRS Rules

Tax-loss harvesting is a strategy to reduce tax liability by selling investments that have incurred unrealized losses. This technique allows investors to realize a capital loss, which can be used to offset capital gains from other investments or up to $3,000 in ordinary income each year.

A wash sale occurs when an investor sells a cryptocurrency or security at a loss and quickly repurchases the same or substantially identical cryptocurrency or security, aiming to generate capital losses. In the case of US cryptocurrency users, if they repurchase their crypto assets immediately after selling them, it constitutes a crypto wash sale. The wash sale rule was established to prevent investors from claiming tax losses on assets they continue to own.

To avoid violating the wash sale rule, investors should wait at least 30 days after selling an asset before repurchasing it. However, this strategy carries the risk that the asset's price may change during the 30-day period, potentially affecting the expected benefits.

The IRS has not specifically stated whether the wash sale rule applies to cryptocurrencies. However, the increasing attention from regulators and lawmakers suggests that there may be a move towards stricter regulations to close any perceived loopholes in the tax treatment of cryptocurrencies.

As such, we recommend that conservative, risk-averse investors avoid crypto wash sales. When in doubt, consult a crypto tax professional like ours at TokenTax. Let’s examine crypto wash sales and how they work.

Per 26 U.S. Code § 1091, loss from wash sales of stock or securities, securities (e.g., investments such as stocks and bonds) are subject to the rule, which means if an investment you hold has lost value, you cannot sell it to claim losses and buy it back within 30 days.

This rule prevents taxpayers from using "artificial" losses to offset their gains and lower their capital gains tax liability. The main idea of the rule is that the use of capital losses for tax purposes if an investor buys back a substantially identical security or crypto asset within 30 days of selling it is not allowed.

Here's a crypto wash sale rule 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 decides to buy 20 BNB for $4,200. This is within 30 days of the sale.

• On his taxes, Aaron reports the $6,000 loss on 20 BNB with the intent of lowering his overall gains from $10,000 to $4,000. Since the wash-sale rule applies, his loss is disallowed for tax purposes. Therefore he is taxed on $10,000 of gains.

• The cost basis of the Aarons new security is adjusted to reflect the disallowed loss. $10,000 ($4,000 +$6,000).

• If Aaron decides later to sell the new security for a gain, the adjusted cost basis is used to calculate the taxable gain or loss.

The IRS wash sale rule does not currently apply to cryptocurrency because it considers virtual currencies to be property rather than securities. This effectively means there is no rule prohibiting crypto wash sales at time of writing.

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

US lawmakers and crypto wash sales

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

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, President Biden 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 expert advice? Use your best judgment with regard to the ever-evolving field of cryptocurrency, especially with a pending crypto wash sale rule in legislation. When in doubt, play it safe.

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

As noted, however, this loophole could be closed, so we strongly recommend avoiding wash sales.

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 and will avoid any future crypto wash sale rule, presuming the rule is the same as that which currently exists for securities.

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. 

With specific attention to the tax regulations or crypto wash sale rule questions in your country, TokenTax crypto tax software calculates capital gains totals using various crypto accounting methods, including FIFO, LIFO, HIFO, the average cost method, and our proprietary Minimization.

With Minimization, we've built upon the HIFO accounting method with a proprietary approach that automatically makes adjustments based on an individual's tax rate to minimize crypto taxes as much as possible.

And if you ever need further assistance or clarity about anything related to crypto and taxes, including the crypto wash sale rule, our crypto tax professionals are available to assist.

If there are changes to the rule, it could have significant implications for crypto investors. A modification to this rule would impact the strategies some investors employ to manage their portfolios and minimize tax liabilities. 

In the event that the rule is extended to include cryptocurrencies, investors would need to reassess their trading practices and consider longer waiting periods before repurchasing assets after a sale to avoid potential penalties. We advise avoiding crypto wash sales regardless.

Changes to the rule could also increase scrutiny from tax authorities and regulatory bodies. Investors should stay informed about any alterations to the rule and proactively adjust their tax strategies.

Seeking guidance from crypto tax professionals like ours at TokenTax can be invaluable during such transitions, helping investors navigate the evolving regulatory landscape and make informed decisions to protect their financial interests and remain compliant.

Determining which of your assets is currently trading at a loss is a crucial aspect of managing your crypto portfolio effectively. To identify underperforming assets, you can regularly track the market value of each crypto holding against its initial cost basis.

Utilizing specialized crypto tax software like ours at TokenTax can simplify this process by providing a comprehensive overview of your portfolio's performance and identifying assets that are currently trading at a loss.

Regularly reviewing your portfolio and assessing individual asset performance with tools such as Zerion allows you to make informed decisions, such as tax-loss harvesting or strategic asset reallocation.

By staying vigilant and leveraging available tools, you can optimize your investment strategy and mitigate potential losses in the dynamic and famously volatile crypto market.

Wash trading in the crypto market involves artificially inflating trading volumes by executing buy and sell orders for the same asset with the intention of creating misleading market activity. 

As of now, wash trading is generally frowned upon by regulatory authorities. However, the legality of wash trading in the crypto space can vary depending on jurisdiction. While wash trading is technically legal for US crypto users, we advise against it as legislation may change this.

Here are answers to some frequently asked questions about the crypto wash sale rule.

Is the wash sale rule 30 days for crypto?

The rule states that your capital loss cannot be claimed on securities if you bought the same asset within 30 days of a sale. Therefore, it's reasonable to assume that the rule does not apply to cryptocurrency based on current IRS guidance.

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. So, if you sell on December 15 and purchase back on January 1, this is considered a wash sale.

Can you still do wash sales with crypto?

Technically, yes, there is no crypto wash sale rule at present. 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. You can easily do this with our software at TokenTax, and if you’d like support, our team of experts is available to help.

The future of the wash sale rule for crypto

Given recent developments in crypto regulations, including signing the Build Back Better Act into effect in March 2022, it is reasonable to anticipate changes in the wash sale rule for crypto. The legislation, which empowers federal agencies to pay closer attention to crypto wash sales, signals a growing interest and potential regulatory shifts in the crypto space.

With the Biden administration expressing interest in crypto cases and investigations becoming more rigorous, it is plausible that the legal status of crypto wash sales could soon change. Therefore, it is advisable to exercise caution. Stay tuned for updates and adapt your strategies proactively as the regulatory landscape evolves. When in doubt, consult a crypto tax professional.

Can you sell crypto for a loss and buy back?

Yes, you can sell crypto for a loss and buy back any time. The wash sale rule applies when traders do this rapidly in order to secure losses for tax purposes. The safest way to do this for tax purposes is to wait 30 days from the time of sale and then purchase back.

How do I bypass the wash sale rule?

The simplest way to bypass the rule is to wait 30 days after selling an asset and then before buying back. The IRS wash sale rule declares that if a trader sells a security at a loss and then repurchases within 30 days, the initial loss cannot be claimed for tax purposes. 

Is wash sale loss disallowed for crypto?

At time of writing, there is no crypto wash sale rule in effect for US taxpayers, and crypto wash sales are technically legal. However, this is expected to change as legislation has already been proposed.

How does the holding period impact the application of the crypto wash sale rule?

The holding period denotes the duration an asset is held before being sold. To trigger the wash sale rule, an investor must repurchase a substantially identical security or crypto asset within 30 days before or after the sale that initiated the wash sale.

Understanding the holding period is crucial to determine whether a transaction falls under the wash sale rule's purview.

Can a wash sale occur across different tax years?

Yes, a wash sale can span across different tax years. The IRS considers transactions that trigger the wash sale rule within 30 days before or after the sale as part of the same "wash sale period." This implies that a sale at the end of one tax year and a repurchase at the beginning of the next tax year can still be deemed a wash sale if the 30-day window is met.

What actions can trigger the wash sale rule?

The wash sale rule is typically activated when an investor sells a security or crypto asset at a loss and then acquires a substantially identical security or crypto asset within 30 days before or after the sale. This encompasses purchasing the same asset in a different account, acquiring a call option on the same security, or obtaining an option or contract to purchase the same security or a substantially identical security.