A wash sale occurs when someone sells crypto or securities at a loss and quickly buys them back for tax benefits.
For crypto users in the US, this is known as a crypto wash sale.
To avoid this, it’s best to wait 30 days after selling before rebuying the asset.
Although the wash sale rule doesn’t officially apply to crypto assets as of 2023, proposed legislation aims to ban crypto wash sales.
The rule, covered by 26 U.S. Code ยง 1091, prevents investors from selling and rebuying assets within 30 days to claim artificial losses for tax purposes.
How does the crypto wash sale rule work?
The wash sale rule prevents investors from using capital losses for tax purposes if they buy back the same asset within 30 days.
For instance, if Aaron sells 20 BNB for a $6,000 loss and buys the same BNB within 30 days, the loss is disallowed for tax purposes.
The adjusted cost basis of the new asset reflects the disallowed loss, affecting future taxable gains.
Also read: When to sell crypto
How to save taxes with the crypto wash sale rule
Currently, the IRS doesn’t apply wash sale rules to cryptocurrencies since they’re seen as property, not securities.
So, there’s no official crypto wash sale rule as of now. However, there are proposals to change this. In 2021, legislation discussions included applying wash sale rules to digital assets, indicating potential crypto wash sale rules.
While these proposals haven’t passed yet, the government’s interest is evident. President Biden signed a bill in March 2022, urging federal agencies to address crypto wash sales.
Given these developments, it’s wise to exercise caution in the evolving crypto landscape, especially with pending legislation.
When unsure, it’s best to err on the side of caution.
How does the wash sale rule impact my tax bill?
The aim of a crypto wash sale is to minimize tax liability by reducing capital gains.
Through a crypto wash sale, you could pay less in taxes.
As noted, however, this loophole could be closed, so we strongly recommend avoiding wash sales.
Safer ways to harvest crypto losses
There are safer strategies that are effective in accomplishing this same goal:
- If you rebuy a crypto asset after the 30 day period passes, your actions no longer classify as wash sale trading and will avoid any future crypto wash sale rule, presuming the rule is the same as that which currently exists for securities.
- You may trade the depreciated asset for a coin with which its price is closely correlated. You would then hold that correlated coin for more than 30 days and then repurchase the original asset.
How TokenTax can help
TokenTax crypto tax software computes capital gains using different methods, including FIFO, LIFO, HIFO, average cost, and our unique Minimization.
Minimization adjusts based on tax rates to minimize crypto taxes effectively.
FAQs
Is the wash sale rule 30 days for crypto?
The wash sale rule doesn’t apply to crypto as per current IRS guidance.
Does the wash sale rule carry over into the next year?
Yes, a crypto wash sale occurs even if it spans across different calendar years.
Can you still do wash sales with crypto?
Yes, but it’s likely to change; the Biden administration is scrutinizing crypto cases.
How can I track assets trading at a loss?
Use TokenTax software to monitor your crypto profits and losses.
Will the wash sale rule for crypto change?
Yes, recent rulings and legislation suggest crypto wash sales will become illegal.
Can you sell crypto for a loss and buy back?
Yes, but waiting 30 days is safest to avoid the wash sale rule.
How do I bypass the wash sale rule?
Wait 30 days before rebuying to bypass the wash sale rule.
Is wash sale loss disallowed for crypto?
Currently, there’s no crypto wash sale rule, but legislation changes are expected.