Cryptocurrency is exempt from wash sale rules. The IRS classifies virtual currency as property. This means 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 is largely unregulated, so cryptocurrency isn't a “security”. Securities are regulated financial instruments with rules to protect investors. 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.
Cryptocurrency is taxed when you receive it as payment or have a transaction where you sell or trade it.
FAQs
The wash sale rule prohibits sales of securities at a loss and reacquiring them within 30 days in order to prevent taxpayers from making "artificial" losses to lower tax liability. There is no crypto wash sale rule for US taxpayers, so crypto wash sales are technically legal.
What is the wash sale rule in crypto? ›
The Wash Sale Rule applies to transactions made 30 days before or after the sale. So, even if you wait to repurchase the asset until 30 days after, you also must have not purchased it originally within 30 days beforehand to avoid a wash sale.
Is the crypto wash sale loophole closed? ›
Cryptocurrency Loophole: Currently, crypto transactions can exploit a loophole not covered by the wash sale rule, allowing for tax-deductible losses. Future Changes Expected: Legislation is likely to extend the wash sale rule to cryptocurrencies, closing the loophole and impacting crypto taxation.
What is the wash sale rule on Coinbase? ›
How does the wash sale rule impact capital losses? The wash sale rule says investors are not allowed to claim capital losses on a security if they buy the same security 30 days before or after the sale. The purpose of the law is to prevent people from selling securities simply to reduce their tax liability.
Is the wash sale rule 30 or 60 days? ›
Is a Wash Sale Window 30 or 60 Days? A wash sale is a total of a 60-day window—starting from 30 days before the sale to 30 days after the sale.
How to wash trade crypto? ›
Crypto wash trading occurs when an investor sells and then immediately buys the same crypto asset. Alternatively, the investor sells an asset like an NFT to themselves, often via a colluding third party. A trade is made, but ownership doesn't change.
What happens if you sell crypto at a loss? ›
This means that when you realize losses after trading, selling, or otherwise disposing of your crypto, your losses offset your capital gains and up to $3,000 of personal income. Any net losses exceeding $3,000 in a given year can be rolled forward into future tax years.
How do you bypass a wash sale? ›
Using ETFs to Circumvent the Wash-Sale Rule — a Legit Loophole?
- Sell a stock and buy an ETF following the relevant investment sector. ...
- Sell a mutual fund and buy a similar ETF. ...
- Sell an Index ETF and buy an ETF from a different sponsor that follows the same index.
Identifying wash trading can be difficult, as the practice is designed to create the illusion of market activity. However, there are a few red flags to look out for: Abnormal trading volumes: If you notice that an asset is experiencing unusually high trading volumes, it could be a sign of wash trading.
How much of crypto is wash trading? ›
Wash trading accounts for 70% of trades on some crypto exchanges, a study found. The practice of firms trading with themselves to boost prices artificially may lure inexperienced investors. Three experts dive into the practice and what it means for the crypto market.
To avoid a wash sale, the investor can wait more than 30 days from the sale to purchase an identical or substantially identical investment or invest in exchange-traded or mutual funds with similar investments to the one sold.
Does the 30 day rule apply to crypto? ›
Also known as the 30-day Rule, the Bed & Breakfast Rule states that any of the crypto you acquire within 30 days of a sale will be used as its cost basis. Each of these rules impacts which cryptos you “sell” and the order you sell them in from an accounting perspective.
Can I buy crypto and sell same day? ›
Day trading refers to buying and selling cryptocurrency and other assets on the same day with the goal of making a profit!
Does wash sale apply to crypto? ›
The IRS wash sale rule does not currently apply to cryptocurrency because it considers virtual currencies to be property rather than securities. This effectively means there is no rule prohibiting crypto wash sales at time of writing. This means that technically crypto wash sales are allowed.
How does the IRS know about wash sales? ›
Note: Wash sales are in scope only if reported on Form 1099-B or on a brokerage or mutual fund statement. Click here for an explanation. A wash sale is the sale of securities at a loss and the acquisition of same (substantially identical) securities within 30 days of sale date (before or after).
Why are capital losses limited to $3,000? ›
The $3,000 loss limit is the amount that can be offset against ordinary income. Above $3,000 is where things can get complicated.
How do day traders avoid the wash sale rule? ›
To avoid a wash sale, you could replace it with a different ETF (or several different ETFs) with similar but not identical assets, such as one tracking the Russell 1000 Index® (RUI). That would preserve your tax break and keep you in the market with about the same asset allocation.
How does the wash sale rule work? ›
A wash sale is when you sell an asset, such as a stock or bond, for a loss but have purchased the same asset or a very similar one within 30 days before or after the sale. A wash sale makes it appear as if you have sold your position and disowned the property, though you really haven't.
