Cryptocurrency and the Wash Sale Rule

Ty GainesUpdated at: Oct 24th, 2021

Want to learn more about how crypto tax works? Check out our cryptocurrency tax guide.

What is a wash sale?

A wash sale is when a trader sells a stock or security at a loss and then reacquires the same asset within 30 days. The IRS prohibits loss deductions for wash sales of stocks and securities.

Does the wash sale rule apply to crypto?

So far, government bodies like the IRS have defined cryptocurrency as property, therefore it is possible wash sale rules may not apply to cryptocurrency.

However, crypto is a rapidly evolving field. Rules and definitions are always changing. For example, recently 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 sales in cryptocurrency or if they will ever disclose if wash sale rules apply. They could institute a ruling next year — or next week.

In fact, currently there is a proposal in the U.S. House Ways and Means Committee that aims to apply wash sale rules to digital assets. If the bill passes, wash sale rules for crypto would go into effect in 2022.

Playing it safe with crypto

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. For example, you could trade the depreciated asset for a coin with which its price is closely correlated, 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 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 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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