Crypto Wash Sale Rule: 2025 IRS Rules
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Investors may want to wait 30 days before repurchasing the same or a similar crypto asset, as upcoming legislative changes could extend wash sale rules to digital currencies, potentially disallowing loss claims if repurchases occur too soon.
Under current tax law, the IRS classifies crypto as property, so the wash sale rule technically does not apply—meaning you can sell and immediately buy back crypto without losing the ability to claim a capital loss. However, we do not recommend this.
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What is the crypto wash sale rule?
The wash sale rule limits how investors can claim losses on assets sold and repurchased quickly. For cryptocurrency users, understanding these rules is essential for planning trades and filing taxes accurately. A wash sale occurs when an investor sells a security or cryptocurrency at a loss and quickly repurchases the same or a substantially identical asset, attempting to claim a capital loss.
Tax-loss harvesting is closely related to the wash sale rule. This strategy lets investors reduce tax liabilities by selling investments with unrealized losses, realizing a capital loss that can offset capital gains or reduce ordinary income by up to $3,000 annually.
For US cryptocurrency users, repurchasing crypto assets immediately after selling them triggers a crypto wash sale, disqualifying the loss for tax purposes if the investor still owns the asset. To avoid this, investors should wait at least 30 days before repurchasing an asset they’ve sold. However, this waiting period introduces risk, as the asset’s price could change, potentially impacting the expected tax benefits.
Although the IRS has not explicitly stated that the wash sale rule applies to cryptocurrencies, increasing regulatory scrutiny and legislative initiatives suggest a move toward stricter tax rules, which may close existing loopholes in crypto tax treatment.
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.
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How does the crypto wash sale rule 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.
Crypto wash sale example
On December 30, Aaron has an overall net gain of $10,000 for the year after accounting for $15,000 in gains and $5,000 in losses from his other investments. In addition, he owns 20 BNB that originally cost him $10,000, though their current market value has fallen to $4,000. Aaron decides to sell these 20 BNB for $4,000, which results in a realized capital loss of $6,000 (the difference between his $10,000 cost basis and the $4,000 sale price).
Then, on January 5—within 30 days of the sale—Aaron repurchases the same 20 BNB for a total of $4,200. Because this repurchase occurs within the 30-day window, the wash sale rule (if it were to apply) would disallow the $6,000 loss. As a result, Aaron cannot use this loss to reduce his taxable gains; he remains subject to tax on his full $10,000 of net gains.
Furthermore, for future tax calculations, the cost basis of his newly acquired BNB is adjusted to include the disallowed loss. This means his new cost basis becomes $4,200 (the repurchase price) plus the $6,000 disallowed loss, totaling $10,200. If Aaron sells these BNB later, this adjusted cost basis will be used to determine his taxable gain or loss on that sale.
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 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.
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.
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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.
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.
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Wash rules changes and impacts on investors
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.
How can I know which of my assets is currently trading at a loss?
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.
Is wash trading in crypto legal?
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.
Crypto wash sale FAQs
Is the wash sale rule 30 days for crypto?
Does the wash sale rule carry over into the next year?
Can you still do wash sales with crypto?
How can I tell which one of my assets is currently trading at a loss?
The future of the wash sale rule for crypto
Can you sell crypto for a loss and buy back?
How do I bypass the wash sale rule?
Is wash sale loss disallowed for crypto?
How does the holding period impact the application of the crypto wash sale rule?
Can a wash sale occur across different tax years?
What actions can trigger the wash sale rule?
How does staking cryptocurrency on Coinbase affect my taxes?
How could the wash sale rule for cryptocurrency affect my trading strategy?
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