Does the Wash Sale Rule Apply to Crypto?

A wash sale happens when a holder sells crypto or a security at a loss to receive tax benefits and quickly rebuys the same or a similar crypto or security. If US investors buy back their crypto assets immediately after a sale, this constitutes a crypto wash sale. 

The simplest way to bypass the wash sale rule is to wait 30 days after selling an asset and then before buying back. At time of writing crypto assets are not technically covered by the wash sale rule, which applies to securities. However, there is proposed legislation aimed to ban crypto wash sales.

As of 2023, 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.

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.

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. Here’s how.

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 in your country, TokenTax 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.

TokenTax makes crypto tax filing simple and efficient. If you would like to speak to our expert team about choosing a plan that’s right for you, contact us at [email protected].

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

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.

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.

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 to 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. 

At time of writing there is no crypto wash sale rule in effect, but this is expected to change as legislation has already been proposed.