What Is the Wash-Sale Rule, and Does It Apply to Crypto?

The Internal Revenue Service has not classified cryptocurrencies as securities but has indicated that they are treated as property for tax purposes.

What Is the Wash-Sale Rule, and Does It Apply to Crypto?



The Wash-Sale Rule is a tax regulation that prohibits investors from claiming a loss on the sale of securities if they purchase a “substantially identical” security within 30 days of the sale. This rule aims to prevent investors from artificially creating a loss for tax purposes, then immediately repurchasing the same protection to maintain their position.

The crypto community has debated whether the Wash-Sale Rule applies to cryptocurrency. While the IRS has not explicitly stated whether the rule applies to crypto, many tax professionals and experts believe it does.

The reason is that the Wash-Sale Rule applies to “securities,” which the IRS defines as stocks, bonds, options, and other investment contracts. The IRS has not classified cryptocurrencies as securities but has indicated that they are treated as property for tax purposes.

However, even if cryptocurrencies are not considered securities, the Wash-Sale Rule could still apply under the broader category of “substantially identical property.” This means that if you sell a cryptocurrency at a loss and then repurchase the same or a similar cryptocurrency within 30 days, you may not be able to claim the loss on your taxes.

It’s worth noting that the IRS has been ramping up its efforts to enforce tax compliance in the crypto space. In 2019, it sent letters to more than 10,000 cryptocurrency holders warning them to report their crypto transactions accurately on their tax returns. In 2020, it added a question about crypto on the front page of Form 1040, the individual tax return form.

To avoid running afoul of the Wash-Sale Rule regarding crypto, investors should consider waiting at least 31 days before repurchasing the same or a similar cryptocurrency after selling at a loss. Alternatively, they can consider purchasing a different cryptocurrency or asset class altogether.

The Wash-Sale Rule is a tax regulation that applies to securities, but it could also apply to cryptocurrencies under the “substantially identical property.” Therefore, investors should be aware of the potential implications of this rule when buying and selling crypto and take steps to ensure compliance with tax regulations.

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