Cryptocurrency and the Wash Sale Rule
The IRS classifies cryptocurrencies like Bitcoin, Ethereum, Dogecoin, or Shiba Inu as property. Cryptocurrency investors are subject to the same capital gains and losses rules that apply to other investors, with one important exception. Cryptocurrency investors escape the wash sale rule.
What is the Wash Sale Rule?
The wash sale rule generally disallows taking a tax loss on the sale or other disposition of stock or securities if you buy the same asset (or a substantially similar one) within 30 days before or after the sale. If you choose to repurchase the same or similar security within the 30-day window, it will deny you the chance to claim a deduction for your loss. You can add the loss disallowed by the wash sales rules to the newly repurchased security cost basis. As a result, any capital gains taxes you’d pay will still be reduced when you choose to sell the new stock later.
The wash sale rule was created to prevent the creation of “artificial” losses and the manipulation of tax laws by trading in and out of stock for the purposes of harvesting capital losses to offset capital gains or income.
Why do the Wash Sale Rules not apply to Cryptocurrencies?
The wash sale rule only applies to assets formally classified as securities (investments like stocks, bonds, ETFs, and other financial instruments) traded on organized exchanges. Cryptocurrencies, at least for now, don’t currently satisfy this requirement. As a result, some investors take advantage of the heightened volatility of many virtual currencies by selling a position to lock in a capital loss and immediately repurchase it without losing exposure to the cryptocurrency.
This tax loophole might soon be closed due to pending legislation. Unlike people investing in securities, crypto investors can take full advantage of the t