Does the Wash Sale Rule Apply to Crypto? (2023 IRS Rules)
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There is no crypto wash sale rule in effect for US taxpayers, and crypto wash sales are technically legal. However, legislators are working to close this loophole, and we recommend avoiding crypto wash sales.
The wash sale rule prohibits sales of securities at a loss and reacquiring them within 30 days in order to prevent taxpayers from making "artificial" losses to lower tax liability.
What is the crypto wash sale rule?
A wash sale occurs when a holder sells crypto or security for a loss and quickly rebuys the same or similar crypto or security to receive tax benefits. If US crypto users buy back their crypto assets immediately after a sale, this is a crypto wash sale.
The easiest way to avoid the wash sale rule is to wait 30 days after selling an asset and then before buying it back. At the time of writing, the wash sale rule does not technically apply to crypto assets. However, there is proposed legislation aimed at banning crypto wash sales.
At time of writing, the crypto wash sale rule remains a gray area. Because of this, 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 (e.g., 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. This rule prevents taxpayers from using "artificial" losses to offset their gains and lower their capital gains tax liability.
How does the crypto wash sale rule work?
The wash sale rules for crypto are easily explained. The main idea of the wash sale 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.
Within 30 days before or after the sale, Aaron could buy the same or a substantially identical security. So on January 5, Aaron he decides to buy 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, which is correct since the wash-sale rule applies. His loss is disallowed for tax purposes.
The cost basis of the Aarons new security is adjusted to reflect the disallowed loss.
If Aaron decides later to sell the new security for a gain, the adjusted cost basis is used to calculate the taxable gain.
How to save 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 effectively means there is no crypto wash sale rule at time of writing.
This means that technically 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, i.e. creating a crypto wash sale rule. 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.
From forms to filing, TokenTax covers all your crypto tax needs.
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 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:
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.
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 Ethereum 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 our helpful post on how to report crypto losses on your taxes.
How TokenTax can help
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.
Schedule a FREE crypto tax consultation
Wash sale rule crypto FAQs
Here are answers to some frequently asked questions about the crypto wash sale rule.
Is the wash sale rule 30 days for crypto?
The wash sale 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 wash sale 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 wash sale 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.
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