Wash sale trading in crypto: is it worth the risk?
Wash sales, as defined by the IRS, are when one sells a stock or security at a loss and reacquires the same stock or security within 30 days before or after said sale. This way, an individual can write off a loss while effectively not having disposed of the security. Per the IRS, loss deductions are strictly not allowed in the instance of wash sale trading.
So far, government bodies like the IRS have defined cryptocurrency as property, therefore it is possible wash sale rules may not apply to cryptocurrency. When the IRS declared cryptocurrency was property in 2014, they were informing people that it was not a currency — like Euros, or Yen — and therefore there was no de minimis exclusion for small transactions, and that all cryptocurrency sales needed to be disclosed on a gain/loss report regardless of magnitude.
However, cryptocurrency is a rapidly evolving field. Rules and definitions are always changing. For example, in the past year, the SEC has begun to focus on regulating ICOs as securities. While established, decentralized cryptocurrencies remain classified as property, they are still open to changes in tax policy. Regardless of the SEC’s ruling, the IRS has final say. We don’t know if/when the IRS may disallow claiming losses from wash sale trading in cryptocurrency. They could institute a ruling next year — or next week.
If you rebuy after the 30 day period passes, your actions no longer classify as wash trading. A safe approach is to sell for a correlated currency — for example selling from an altcoin into ethereum — and then waiting until past the 30 day period to buy again.
Our approach for these gray area situations is education and empowerment. We aim to inform people on existing guidelines as well as potential for new rules in the future. Our advice? Use your best judgement in regards to the ever-evolving field of cryptocurrency. When in doubt, play it safe.
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