The Crypto Wash Sale Rule: Is There a Loophole?

The IRS prohibits wash trading for financial securities—but does this rule apply to crypto assets? Learn more.

Tynisa (Ty) Gaines
ByTynisa (Ty) Gaines, EA Expert reviewed byArthur Teller, CPAUpdated on April 28, 2022 · minute read

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Key Takeaways

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

  • It does not currently apply to crypto, but legislators are actively working to close this loophole.

What is the wash sale rule?

The IRS' wash sale rule prohibits investors for claiming losses on securities sold at a loss and reacquired within 30 days.[1] This prevents taxpayers from claiming "artificial" losses at the end of the tax year in order to lower their capital gains.

Does the wash sale rule apply to crypto?

The IRS currently defines cryptocurrency assets as property, not securities. Therefore, currently the wash rule doesn't technically apply to crypto assets. Many investors take advantage of this loophole when crypto tax loss harvesting, or strategically selling assets at a loss in order to lower their total capital gains.

However, the regulatory landscape for crypto is always changing. It's possible that crypto wash trading could be explicitly disallowed next year—or next week.

In fact, in 2021, the Biden administration's Build Back Better bill[2] and a House Ways and Means Committee proposal[3] included language applying wash sale rules to digital assets. Although the Build Back Better bill stalled in Congress, these developments underline the government's interest in the matter.[4]

Safer crypto tax loss harvesting

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

There are safer ways to harvest losses on a crypto asset. To avoid a wash sale, one approach is to 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. For example, you might trade UNI for DPI, hold DPI until the wash sale period passes, and then repurchase UNI.

Our advice? Use your best judgment in regards to the ever-evolving field of cryptocurrency and especially with wash sale IRS regulations. When in doubt, play it safe.

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References

Last reviewed by Arthur Teller, CPA on April 28, 2022 · Sources

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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