Does the Wash Sale Rule Apply to Crypto?
The IRS prohibits wash trading for financial securities—but is there a wash sale rule for crypto? Learn more.
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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.
The IRS' wash sale rule prohibits investors for claiming losses on securities sold at a loss and reacquired within 30 days. This 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 apply to crypto?
The IRS currently defines cryptocurrency assets as property, not securities. Therefore, currently the wash rule doesn't technically apply to digital assets. Many crypto investors take advantage of this loophole when crypto tax loss harvesting, or strategically selling assets at a loss in order to lower their tax bill.
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 and 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 underline the government's interest in the matter.
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.
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.
Our advice? Use your best judgment in regards to the ever-evolving field of cryptocurrency and especially with wash sale regulations. When in doubt, play it safe.
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Last reviewed by Arthur Teller, CPA on August 19, 2022 · Sources