Crypto Investors: Year-End Tax Planning and the Wash Sale Rule
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As 2021 draws to a close, cryptocurrency investors should take a close look at their portfolios and the capital gains or losses realized throughout the year.
Unlike stocks, which are subject to wash sale rules that prevent claiming a loss if an identical security is repurchased within 30 days, cryptocurrencies are currently exempt because the IRS classifies them as property, not securities.
How Wash Sale Rules Work for Securities
For traditional securities, the wash sale rule prohibits a deduction if you sell a security at a loss and then purchase a “substantially identical” asset within 30 days before or after the sale. This rule is designed to prevent taxpayers from claiming a tax benefit without truly changing their investment position.
Crypto’s Current Loophole
Because cryptocurrencies are treated as property, this restriction does not currently apply to crypto trading. This means investors can sell a cryptocurrency at a loss and immediately repurchase the same token while still claiming the deduction—something not allowed with stocks.
However, this advantage may be short-lived. The proposed Build Back Better Act, which passed the U.S. House of Representatives on November 19, 2021, could subject crypto to the same wash sale rules as securities if enacted. According to the Joint Committee on Taxation, applying wash sale rules to crypto could generate $16.8 billion in revenue over the next ten years.
What Investors Should Do
With potential changes on the horizon, investors should review their crypto holdings and trading activity before the end of the year. By strategically realizing losses now, you may be able to offset gains from 2021, maximizing tax efficiency while the loophole still exists.
It is important to stay proactive, as the opportunity to capture these losses could close quickly if the legislation moves forward.
Current Status (As of February 2022)
At present, the fate of the wash sale rule for crypto remains uncertain, as the Build Back Better Act is still pending and has not been finalized in the Senate. Crypto investors should continue to monitor developments and adjust their year-end tax planning accordingly.