The Crypto Wash Sale Rule - Is There a Loophole?

What is the wash sale rule?

The IRS' wash sale rule prohibits buyers for claiming losses on securities offered at a loss and reacquired inside 30 days.[1] This prevents taxpayers from claiming "synthetic" losses on the give up of the tax 12 months so as to decrease their capital gains.

Does the wash sale rule practice to crypto?

The IRS currently defines cryptocurrency belongings as property, now not securities. Therefore, currently the wash rule does not technically apply to crypto assets. Many buyers take advantage of this loophole while crypto tax loss harvesting, or strategically promoting property at a loss as a way to lower their total capital profits.

However, the regulatory panorama for crypto is constantly changing. It's possible that crypto wash buying and selling can be explicitly disallowed next yr—or next week.

In truth, in 2021, the Biden management's Build Back Better bill[2] and a House Ways and Means Committee inspiration[3] blanketed language applying wash sale rules to virtual belongings. Although the Build Back Better invoice stalled in Congress, these developments underline the authorities's interest inside the matter.[4]

Safer crypto tax loss harvesting

If you rebuy a crypto asset after the 30 day period passes, your actions no longer classify as wash sale trading.

There are more secure approaches to harvest losses on a crypto asset. To avoid a wash sale, one technique is to change the depreciated asset for a coin with which its rate is intently correlated. You could then maintain that correlated coin for more than 30 days, and then repurchase the original asset. For example, you would possibly change UNI for DPI, keep DPI till the wash sale length passes, after which repurchase UNI.

Our advice? Use your nice judgment regarding the ever-evolving area of cryptocurrency and particularly with wash sale IRS guidelines. When in doubt, play it secure.