Cryptocurrency and the ‘Wash Sale’ Rule
Tuesday, September 20, 2022: The IRS classifies virtual currencies like Bitcoin, Ethereum, and Dogecoin as property. Which means that crypto follows the same rules as stocks and bonds: you pay tax if you sell, exchange, spend or convert crypto for more than it costs you, and deduct losses if you receive less than what you paid.
But unlike stocks and bonds, crypto escapes one rule that applies solely to financial securities: the “wash sale” rule.* Securities are regulated financial instruments with rules to protect investors. Since cryptocurrency is largely unregulated, it isn’t a “security” so the wash sale rule does not apply. This means crypto has the same trading rules as precious metals including gold and silver or “real” currencies such as the British pound or Euro.
Cryptocurrency is volatile and prices change rapidly. Because you can ignore the wash sale rule, you can sell coins during market declines to reduce losses and then quickly buy back those coins as prices bottom out. You can apply those losses against other capital gains to lower their overall taxable profit. In years where these losses are substantial, they can be carried forward to offset future gains.
It is important to note that this may be a temporary tax loophole. The rules may change as a result of pending legislation.
By Jon C. Holmes, CPA, LSWG Managing Principal
*The wash sale rule says that if you have an investment that has lost money and you sell it, you can’t buy it back within 30 days before or after that sale. Effectively, you’ve really got to get rid of the investment for 30 days in order to get the loss. Otherwise, the loss is disallowed and gets added to the basis of the new purchase you made.