- What Is the Crypto Tax Wash Rule?
- Key Components of the Crypto Wash Rule
- How the Crypto Wash Rule Works (With Example)
- 4 Strategies to Avoid the Crypto Tax Wash Rule
- FAQ: Crypto Tax Wash Rule
- 1. Does the wash rule apply globally?
- 2. How does the IRS track crypto wash sales?
- 3. Are NFTs included?
- 4. What if I sell at a profit after a wash sale?
What Is the Crypto Tax Wash Rule?
The crypto tax wash rule is a regulation designed to prevent investors from claiming artificial losses on cryptocurrency trades. Modeled after the traditional wash sale rule for stocks, it disallows taxpayers from deducting losses if they repurchase a “substantially identical” asset within 30 days before or after the sale. While the IRS historically excluded crypto from wash sale rules, the 2021 Infrastructure Investment and Jobs Act expanded these provisions to include digital assets starting in 2023.
Key Components of the Crypto Wash Rule
- 30-Day Window: Selling and repurchasing the same crypto within 61 days (30 days before/after the sale) triggers the rule.
- Identical Assets: Applies only to the same cryptocurrency (e.g., selling and rebuying Bitcoin).
- Loss Disallowance: The IRS blocks the deduction of the loss on your tax return.
- Cost Basis Adjustment: The disallowed loss is added to the cost basis of the repurchased asset.
How the Crypto Wash Rule Works (With Example)
Suppose you sell 1 Ethereum (ETH) at a $1,000 loss on December 1. If you buy back ETH on December 15, the $1,000 loss is disallowed. However, the $1,000 is added to your new ETH purchase’s cost basis, potentially reducing future taxes when you sell.
4 Strategies to Avoid the Crypto Tax Wash Rule
- Wait 31 Days: Delay repurchasing the same asset for 31 days post-sale.
- Buy a Different Crypto: Swap Bitcoin for Ethereum to sidestep “identical asset” criteria.
- Harvest Losses Strategically: Offset gains without repurchasing too soon.
- Use Tax Software: Tools like CoinTracker or Koinly flag potential wash sales.
FAQ: Crypto Tax Wash Rule
1. Does the wash rule apply globally?
No—it only affects U.S. taxpayers filing with the IRS.
2. How does the IRS track crypto wash sales?
Through Form 8949 and crypto exchange reporting via Form 1099-B. Always report transactions accurately.
3. Are NFTs included?
Yes, if sold at a loss and repurchased within 30 days.
4. What if I sell at a profit after a wash sale?
The disallowed loss increases your cost basis, lowering taxable gains later.
Note: IRS guidance is still evolving. Consult a crypto tax professional for personalized advice.
