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:
- Identify an asset that has deeply depreciated in value in your portfolio
- Sell that asset at a loss
- Calculate, with crypto tax software such as CoinTracking, how much the realized loss was
- Include that loss in your tax report for the year
- Buy back the asset at about the same price that you sold the asset for at this trade
- Take the tax loss deduction
- Reduce your capital gains by deducting that loss
- 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.
You need to report those losses in the right crypto tax form, alongside your other gains/losses, separated by long-term and short-term trades, and include them on Form 8949 and Schedule D of your Form 1040.
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.
Frequently Asked Questions
Does the wash-sale rule apply to crypto?
No, the wash sale rule currently does not apply to crypto, enabling investors to sell and buy back the same crypto asset before 30 days have passed. Investors can deduct those losses and still buy back and hold the same asset since the wash sale rule does not apply to crypto under the current tax law.
How Do I Benefit from Crypto Wash Sales?
Investors can benefit from crypto wash sales by deducting their losses from selling their crypto in a market downturn, buying back the same asset right away, and utilizing the absence of the wash sale rule to offset their capital gains from their other trades.
By deducting the loss from the sale of a crypto asset, investors can lower their crypto taxes by using the loss to offset their capital gains for the tax year.
What is the 30-day wash sale rule in crypto?
The 30-day wash sale rule does not apply to crypto, with investors being able to sell a cryptocurrency and immediately buy it back (before 30 days have passed). If the wash sale rule applied to crypto, investors would not be able to buy back the same cryptocurrency before 30 days had passed.
What’s the Penalty for Violating the Crypto Wash-Sale Rule?
Under the current tax law, there are no penalties for selling a cryptocurrency, buying it back, and deducting its loss because the wash sale rule does not apply to crypto.
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.
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:
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.
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.