Crypto Wash Sale Rule: The Ultimate Guide [2024]

The crypto wash sale rule benefits crypto investors by reducing their crypto taxes. How?

The US does not include cryptocurrencies under the current wash sale rule, enabling investors to claim a loss deduction and use it to offset capital gains.

Discover more in our new guide about crypto wash sales.

What is the wash sale rule?

The wash sale rule applies to securities in the US, prohibiting investors from selling an asset and buying the same or substantially the same asset before or after 30 days from the date of sale and realizing that loss to offset the investor’s capital gains.

If an asset has lost most of its value, it can be beneficial for investors to realize a big loss and deduct those losses to offset their capital gains, effectively reducing their crypto taxes. However, when it comes to securities like stocks, US-based investors cannot realize that loss and buy the same asset within 30 days of selling it. 

As a result, investors in the US cannot utilize the wash sale rule for securities, including stocks or mutual funds. 

Does wash sale apply to crypto?

Currently, the wash sale rule does not apply to crypto investors, allowing them to sell a crypto asset at a loss and immediately buy it (before 30 days have passed). 

Since the wash sale rule excludes cryptocurrencies, investors can take advantage of it to save on their crypto taxes by realizing losses on their crypto assets that have declined in price and buying them back to still capitalize on the potential price increase.

Does wash sale apply to crypto in 2023?

In 2023, investors can still enjoy the benefit of the wash sale rule not yet applicable to cryptocurrencies, enabling them to realize losses and buy the same digital asset back before 30 days have passed. 

How does the wash-sale rule work?

The wash sale rule prohibits investors from selling an asset that is classified as security at a loss and buying it again within 30 days. This is to prevent the abuse of utilizing tax loss deductions to reduce capital gains taxes, then buying back the same asset shortly after.

Example

Let’s imagine that you bought 300 “Xtokens” at $1 in January 2022. In November, each “Xtoken” is now worth $0.2. You don’t believe the “Xtoken” will recover that much, and you have over $20,000 in capital gains from other trades you made during the year.

You’ll want to take advantage of the lack of a crypto wash sale rule and realize this loss but still buy back the “Xtoken” because you believe it will go up in price down the road, so you want to hold it. 

The loss will be -$240 (300x$0.2 – 300 x $1). You can take advantage of your ability to sell this asset, utilize the loss to offset your capital gains, and then buy back 300 “Xtokens” at $0.2 each right away without being restricted by the wash sale rule.

Are crypto losses subject to the wash sale rule?

Crypto losses are not subject to the wash sale rule, as cryptocurrencies do not fall under the scope of the wash sale rule, unlike securities (e.g., stocks).

You can determine your crypto losses by deducting the cost basis of your trade from your total sales proceeds. Usually, crypto investors realize losses at the end of the year when they know they can offset their capital gains by realizing a big loss from another trade.

This is called loss harvesting. The fact that crypto assets are not subject to the wash sale rule helps crypto investors to fully utilize loss harvesting.

How to avoid wash-sale rule violations?

The easiest way to avoid wash sale rule violations is to wait more than 30 days before buying back the same asset you sold before. You should also avoid buying the same asset before you sell it within 30 days. 

Investors can still use other tax loss programs like crypto tax loss harvesting to reduce their capital gains, usually around the end of the year. With crypto tax loss harvesting, investors can sell an asset at a loss and get a tax deduction that will lower their other capital gains and reduce their overall crypto taxes.

To avoid a violation of the wash sale rule, you cannot buy back the same asset. However, you can buy a different crypto asset that is not considered substantially the same as the one you sold and still take advantage of the low market price. 

What is the 30-day rule in crypto?

Crypto is not subject to the 30-day limitation under the wash sale rule, unlike securities (e.g., stocks), which enable investors to sell a particular digital asset, realize a loss, and buy it back within 30 days. You can use the loss to offset your capital gains from the sale of your other investment assets.

Special Considerations

Substantially Identical Assets

Under the tax regulation, if two different stocks are linked in such a way that any change in the price of one will be reflected in the price of another, they’re likely to be treated as substantially identical securities for purposes of the wash sale rule. 

If the wash sale rule becomes applicable to cryptocurrencies, the same approach will be used to determine whether a crypto trade is considered a wash sale.

Cost Base Change

If a trade is not subject to the wash sale rule, you will get a new cost basis and new holding period starting date when you buy an asset within 30 days from when you sold it for a loss. The cost basis will be based on the price you pay for the new purchase, and the holding period will start at your new purchase date.

If a trade is subject to the wash rule, your loss is added to the cost basis of the new purchase. The holding period of the asset you sold is also added to the holding period of the new purchase. This creates an effect that is as if you have never sold the asset. 

30 or 60 Days?

Some people thought the wash sale rule only prohibits the realization of a capital loss if you repurchase the asset within 30 days after you sold the asset for a loss.

The wash sale rule prohibits the realization of a loss deduction if you purchase the same or substantially identical asset either 30 days before or after you sold the asset for a loss. In other words, there is a 60-day window surrounding the sale under the wash sale rule. 

Ways to Avoid the Crypto Wash-Sale Rule

There are a few ways to avoid the wash sale rule in crypto and to reduce your overall crypto taxes. 

Wait 31 days before buying back the same cryptocurrency

The easiest way to avoid the wash sale rule is to wait for 30+ days before buying the same asset you sold to realize a loss. 

If you want to deduct a loss and still hold the same asset, you’d need to wait 31 or more days before buying back that asset to renew its cost basis. 

In addition, you should avoid selling an asset within 30 days after your purchase to avoid not getting a loss deduction under the wash sale rule. 

What is the wash sale rule on Coinbase?

The wash sale rule on Coinbase is the same as in any other exchange or broker for crypto, where investors can realize a loss (sell their asset at a loss) and immediately buy the same asset back while taking a loss deduction.

Save taxes with the crypto wash sale rule

You can reduce your crypto taxes by taking advantage of the wash sale rule not applying to your crypto portfolio.

Here’s how you can save taxes about the crypto wash sale rule:

1. Identify an asset that has deeply depreciated in value in your portfolio
2. Sell that asset at a loss
3. Calculate, with crypto tax software such as CoinTracking, how much the realized loss was
4. Include that loss in your tax report for the year
5. Buy back the asset at about the same price that you sold the asset for at this trade
6. Take the tax loss deduction
7. Reduce your capital gains by deducting that loss
8. Lower your crypto taxes for the year

How does the wash sale rule impact my crypto taxes?

Deducting losses from trades and taking advantage of the absence of the wash sale rule for crypto to buy back the same asset right away and use the loss to lower your crypto taxes by offsetting your overall capital gains. 

Crypto tax loss harvesting, and, in particular, deducting losses from not having a crypto wash sale rule, can help to lower crypto taxes for investors, assuming you have gains from other sales of investment assets.

How to track cryptocurrencies at a loss?

You can track the gain or loss on each crypto trade by using a crypto tax software or portfolio tracker that automatically calculates it for you. We recommend CoinTracking because it’s both a crypto tax software and a portfolio tracker.

By importing your crypto trades to a crypto tax software, you can automatically determine the capital gains/losses on all of your trades and report them correctly in your crypto tax reports.

If you accurately track your losses, you can deduct them from your capital gains, effectively reducing your overall gains and lowering your final tax bill.

Track your crypto wash sales with CoinTracking

The easiest way to track the assets you have sold under the crypto wash sale rule is by using crypto tax software like CoinTracking.

With CoinTracking, you can import your trades, determine the loss when you sell an asset, use that loss to deduct your capital gains, and include it in your tax report (according to an officially accepted accounting method).

Reporting a Wash Sale Loss

In the US, crypto trading is taxed at a capital gains level, while losses from wash sales or other transactions also need to be reported in the right crypto tax forms. 

Investors need to report their capital gains/losses on Form 8949 and Schedule D of their Form 1040, including losses from crypto wash sales. 

If you have other income beyond capital gains, you’d need to report those in your Income Tax Return. Discover more about how to report crypto on taxes.

Are Wash Sales Illegal?

Deducting a loss on your taxes from a wash sale on assets like stocks is not allowed in the US. But currently, there are no wash sale rules for cryptocurrencies. It is legal to sell a digital asset and buy the same asset back within 30 days, deducting that loss while still holding the same asset. 

Has the wash sale rule changed?

In May 2023, President Biden called for the “end of tax loopholes” for wealthy crypto investors, with many indicating that he was referring to the potential end of the crypto wash sale rule. 

With the end of such tax loopholes in crypto, the US government could collect an additional $18 billion in taxes.

Meanwhile, many efforts have been made by US agencies, including the IRS, to hire more agents and employ more resources to tackle tax evasion related to cryptocurrencies. 

Currently, there are no laws that disallow this exception for crypto investors, from the crypto wash sale rule to crypto tax loss harvesting. Discover how these and other measures can reduce your crypto taxes.

The best crypto tax software

The best crypto tax tool in the market is CoinTracking.

With CoinTracking, you track your gains/losses, generate crypto tax documents, and much more, including:

• Track trades from 110+ available exchanges, DeFi and NFTs
• 20+ advanced portfolio reporting features
• Shows you which coins are eligible for a tax-free rate
• 10+ accounting methods (e.g., FIFO, LIFO, HMRC, ACB)

Crypto taxes done for you with Full-Service

CoinTracking also offers a Full Service for US crypto investors. A crypto reconciliation tax expert from Polygon Advisory Group, a leading US crypto tax firm, will review your CoinTracking account, help fix any errors, and ensure you submit your crypto tax reports error-free.

Conclusion

Currently, the wash sale rule does not apply to crypto, enabling investors to take advantage of this loophole to reduce their crypto taxes. 

By deducting the loss from selling a crypto asset and immediately buying it back, investors can lower their capital gains from other trades and still hold the asset on a new cost basis. 

The absence of a wash sale rule is one of the best ways for investors to lower or pay zero taxes on their cryptocurrencies. However, current news from the Biden administration indicates that this tax loophole may end soon. Please pay attention to the regulatory landscape in the US and how that can affect crypto taxes in the near future.

Disclaimer: All the information provided above is for informational purposes only and should not be considered as professional investment, legal, or tax advice. You should conduct your own research or consult with a professional financial advisor when investing.