Crypto Wash Sale Rules: Does the Wash Sale Rule Apply to Crypto?

If you’ve been trading cryptocurrency, you’ve probably heard about the “crypto tax loophole” that allows investors to sell at a loss and immediately repurchase the same asset. Unlike stocks, crypto isn’t subject to the wash sale rule - at least not yet.

This distinction has saved crypto investors millions in taxes. But with proposed legislation threatening to close this loophole, understanding the current rules and how to take advantage of them has never been more important.

In this comprehensive guide, we’ll explain exactly how wash sale rules work, why they don’t apply to cryptocurrency, and what strategies you can use to legally minimize your tax burden before regulations change.

What Is the Wash Sale Rule?

The wash sale rule is a tax regulation that prevents investors from claiming artificial losses on their taxes. It was created to stop a simple but abusive strategy: selling a stock at a loss for the tax deduction, then immediately buying it back to maintain your position.

How the Wash Sale Rule Works for Stocks

For stocks and securities, the wash sale rule works like this:

You sell shares at a loss
If you buy “substantially identical” shares within 30 days before or after the sale, the loss is disallowed
The disallowed loss gets added to the cost basis of your new shares
You can only claim the loss when you eventually sell without triggering another wash sale

Example of a wash sale:

You bought 100 shares of Apple at $200 per share ($20,000 total)
Apple drops to $150 per share
You sell all 100 shares for $15,000, realizing a $5,000 loss
The next day, you buy 100 shares of Apple at $151 per share
Result: Your $5,000 loss is disallowed due to the wash sale rule

The loss doesn’t disappear forever - it gets added to your new cost basis. But you can’t use it to offset gains in the current tax year, which is often when you need it most.

The 30-Day Window

The wash sale rule creates a 61-day window where you cannot repurchase:

30 days before the sale
The day of the sale
30 days after the sale

This means if you want to harvest a loss and buy back the same stock, you need to wait at least 31 days - during which time the price could move significantly against you.

Does the Wash Sale Rule Apply to Cryptocurrency?

No, the wash sale rule does not currently apply to cryptocurrency.

This is one of the most significant tax advantages crypto investors have over traditional securities investors. Here’s why:

Cryptocurrency Is Classified as Property

The IRS classifies cryptocurrency as “property” for tax purposes, not as a “security” or “stock.” This classification comes from IRS Notice 2014-21, which established the foundational tax treatment of virtual currencies.

The wash sale rule, codified in IRC Section 1091, specifically applies to:

Stocks
Securities
Options and contracts to acquire stock

Because cryptocurrency doesn’t fall into any of these categories under current law, the wash sale rule simply doesn’t apply.

What This Means for Crypto Investors

You can legally:

Sell Bitcoin at a loss on December 30th
Buy it back immediately on December 31st
Claim the full loss on your tax return
Maintain your position in Bitcoin without any waiting period

This is perfectly legal under current tax law. The IRS has not challenged this interpretation, and multiple tax court cases have upheld the property classification of cryptocurrency.

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The Crypto Tax Loophole Explained

The absence of wash sale rules for crypto creates what’s commonly called the “crypto tax loophole.” Let’s break down exactly how valuable this can be.

The Math Behind Tax-Loss Harvesting Without Wash Sales

Consider this scenario:

Traditional Stock Investor:

Holds Apple stock with $10,000 unrealized loss
Wants to harvest the loss but keep their Apple position
Must sell, wait 31 days, then rebuy
Risk: Apple rises 15% during the waiting period, losing $1,500 in gains
Net benefit significantly reduced

Crypto Investor:

Holds Bitcoin with $10,000 unrealized loss
Sells Bitcoin and immediately rebuys
Claims full $10,000 loss on taxes
If in 32% tax bracket, saves $3,200 in taxes
Maintains exact same Bitcoin position
No market risk during any waiting period

Real Tax Savings Example

Let’s say you’re an active crypto trader with the following situation:

Short-term capital gains: $50,000
Unrealized losses across portfolio: $30,000
Tax bracket: 32% federal + 5% state = 37%

Without tax-loss harvesting:

Tax owed: $50,000 x 37% = $18,500

With tax-loss harvesting (using the crypto loophole):

Harvest $30,000 in losses, immediately rebuy
Net taxable gains: $50,000 - $30,000 = $20,000
Tax owed: $20,000 x 37% = $7,400
Tax savings: $11,100

And you still own all the same crypto you started with.

How to Take Advantage Before Regulations Change

The crypto wash sale loophole won’t last forever. Legislation to close it has been proposed multiple times, and it’s likely only a matter of time before it passes. Here’s how to maximize your tax savings while you still can.

Strategy 1: Harvest Losses at Year-End

December is the optimal time for tax-loss harvesting because:

You know your full year’s gains and income
You can calculate exactly how much loss you need to offset gains
You still have time to harvest before the tax year closes

Action steps:

Calculate your total capital gains for the year
Identify all positions trading at a loss
Sell enough losing positions to offset your gains
Immediately repurchase to maintain your positions
Document everything carefully

Strategy 2: Continuous Tax-Loss Harvesting

Don’t wait until December. Sophisticated investors harvest losses throughout the year whenever significant dips occur.

Benefits of continuous harvesting:

Capture losses during major market downturns
Losses can carry forward to future years if not needed immediately
More opportunities to harvest in volatile markets

Example: During a 40% market crash, you could harvest losses across your entire portfolio, immediately rebuy everything, and bank those losses for current or future tax years.

Strategy 3: Convert Between Similar Assets

While not required for crypto, some investors prefer to swap into similar but not identical assets:

Sell Bitcoin (BTC), buy Bitcoin ETF, then swap back later
Sell Ethereum (ETH), buy staked ETH (stETH), then swap back
Sell one stablecoin at a loss, buy a different stablecoin

This strategy provides even more certainty that your tax treatment will be upheld if regulations change.

Awaken Tax makes tax-loss harvesting simple. It automatically tracks your cost basis across all wallets and shows you exactly which positions have harvestable losses. Get started free and take control of your crypto taxes.

2024/2025 Proposed Legislation Changes

Multiple legislative efforts have attempted to apply wash sale rules to cryptocurrency. Understanding these proposals helps you prepare for potential changes.

The Build Back Better Act (2021-2022)

The original Build Back Better Act included provisions to:

Apply wash sale rules to cryptocurrency
Apply wash sale rules to commodities and foreign currencies
Make these changes effective for tax years beginning after December 31, 2021

The bill ultimately failed to pass in its original form, and these provisions were dropped from subsequent legislation.

Crypto-Asset Reporting Requirements (2024)

The Infrastructure Investment and Jobs Act of 2021 included crypto reporting requirements that took effect in 2024:

Crypto exchanges must issue 1099 forms
Brokers must report cost basis information
Greater IRS visibility into crypto transactions

However, this legislation did not include wash sale rules for crypto.

2024-2025 Legislative Attempts

Several bills proposed in 2024 and 2025 have included wash sale provisions:

The Closing the Wash Sale Loophole Act:

Would apply wash sale rules to digital assets
Includes cryptocurrency, NFTs, and other digital property
Uses the same 30-day window as securities

IRS Budget Proposals:

Treasury Department has repeatedly requested authority to apply wash sale rules to crypto
Included in multiple presidential budget proposals
Has not yet been enacted into law

Current Status (2026)

As of January 2026, the wash sale rule still does not apply to cryptocurrency. However, the regulatory landscape continues to evolve, and investors should stay informed about potential changes.

The “Substantially Identical” Debate for Crypto

Even if wash sale rules were applied to crypto, significant questions remain about what would constitute a “substantially identical” asset.

The Complexity of Crypto Assets

For stocks, “substantially identical” is relatively clear - shares of the same company are identical. But crypto raises unique questions:

Is Bitcoin “substantially identical” to:

Bitcoin purchased on a different exchange?
Wrapped Bitcoin (WBTC)?
Bitcoin held in an ETF?
A Bitcoin derivative or futures contract?

Is Ethereum “substantially identical” to:

Staked Ethereum (stETH from Lido)?
Ethereum on Layer 2 networks?
Ethereum Classic?

Potential Regulatory Interpretations

If wash sale rules are applied to crypto, regulators might take one of several approaches:

Narrow interpretation:

Only the exact same token on the same blockchain is substantially identical
Wrapped versions, staked versions, and L2 versions might not trigger wash sales

Broad interpretation:

Any asset tracking the same underlying value is substantially identical
Bitcoin, WBTC, Bitcoin ETFs, and Bitcoin futures would all be considered identical

Economic substance approach:

Focus on whether the investor maintained economic exposure to the same asset
Most restrictive interpretation

Until regulations are finalized, this remains an open question. Smart investors are documenting their rationale for any positions they take.

Strategies for Tax-Loss Harvesting Without Wash Sale Concerns

Even if you’re risk-averse or want to prepare for potential regulatory changes, you can still benefit from tax-loss harvesting using these strategies.

Strategy 1: Swap to Different Assets in the Same Sector

Instead of immediately rebuying the same crypto, swap to a correlated but different asset:

For Bitcoin exposure:

Sell BTC at a loss
Buy ETH or a Bitcoin mining stock
After 31 days, swap back to BTC if desired

For Ethereum exposure:

Sell ETH at a loss
Buy SOL, AVAX, or another smart contract platform
Swap back to ETH after 31 days

For DeFi exposure:

Sell UNI at a loss
Buy AAVE, CRV, or another DeFi token
Return to UNI after the waiting period

Strategy 2: Use Stablecoins as Temporary Holding

If you want to completely de-risk during the waiting period:

Sell crypto at a loss
Convert to stablecoins (USDC, USDT)
Wait 31+ days
Rebuy your original crypto

Downside: You miss any upside during the waiting period Upside: No market risk, crystal clear tax treatment

Strategy 3: Dollar-Cost Average Back In

Instead of waiting and buying back all at once:

Sell crypto at a loss
Spread repurchases over 5-6 weeks
Start buying after day 31
Average into the position over time

This approach reduces timing risk while maintaining tax compliance.

Strategy 4: ETF and Spot Asset Switching (Future-Proofing)

If Bitcoin or Ethereum ETFs are not considered “substantially identical” to the underlying crypto:

Sell BTC at a loss
Immediately buy a Bitcoin ETF
After 31 days, sell ETF and buy BTC

This strategy may provide the best of both worlds - maintaining market exposure while clearly avoiding wash sale concerns.

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When Regulations Might Change

Predicting exactly when Congress will close the crypto wash sale loophole is impossible, but here’s what we know:

Factors Favoring Near-Term Change

Bipartisan support: Both parties have shown interest in closing perceived tax loopholes
Revenue generation: Congressional Budget Office estimates billions in additional revenue
Regulatory consistency: Arguments for treating crypto like securities continue to grow
IRS capacity: Enhanced reporting requirements give IRS data to enforce new rules

Factors Delaying Change

Legislative gridlock: Congress has struggled to pass major tax legislation
Industry lobbying: Crypto industry actively opposes wash sale application
Implementation complexity: Defining “substantially identical” for crypto is genuinely difficult
Other priorities: Larger economic concerns may take precedence

Our Prediction

Based on legislative trends, we expect wash sale rules could be applied to cryptocurrency within the next 1-3 years. The 2026-2027 tax years may be the last to enjoy this advantage.

Recommendation: Take advantage of tax-loss harvesting opportunities now, while maintaining careful documentation in case rules change retroactively (unlikely but possible).

Record Keeping Requirements

Proper documentation is essential for tax-loss harvesting, whether or not wash sale rules apply. Here’s what you need to track:

For Every Transaction, Record:

Date and time of the transaction
Asset bought or sold (specific token and blockchain)
Quantity of the asset
Price per unit at the time of transaction
Total value in your local currency (USD, GBP, CAD, AUD, etc.)
Fees paid (including gas fees)
Wallet/exchange where the transaction occurred
Purpose of the transaction (if relevant)

Cost Basis Tracking Methods

The IRS allows several methods for calculating cost basis:

FIFO (First In, First Out):

Oldest assets are sold first
Default method if you don’t specify otherwise

LIFO (Last In, First Out):

Newest assets are sold first
Can be advantageous in rising markets

HIFO (Highest In, First Out):

Assets with highest cost basis sold first
Typically minimizes taxable gains

Specific Identification:

You specify exactly which assets are being sold
Most flexible but requires detailed records

Why Automated Tracking Matters

With hundreds or thousands of transactions across multiple wallets and exchanges, manual tracking is virtually impossible. This is where Awaken Tax becomes invaluable:

Automatic import from 500+ exchanges and 100+ blockchains
Cost basis calculation using your preferred method
Real-time loss tracking for tax-loss harvesting opportunities
Audit-ready reports with complete transaction history
Support for 55+ countries including UK, Canada, and Australia

Best Practices Going Forward

As the regulatory landscape evolves, here are the best practices for crypto tax management:

1. Harvest Losses Aggressively (While You Can)

The crypto wash sale loophole is valuable and temporary. Use it.

Review your portfolio monthly for loss harvesting opportunities
Don’t wait until year-end when markets may have recovered
Document every transaction thoroughly

2. Stay Informed About Legislative Changes

Follow crypto tax news from reputable sources
Sign up for alerts about relevant legislation
Consult with a tax professional annually

3. Use Professional Tax Software

Manual tracking leads to errors and missed opportunities. Professional software like Awaken Tax provides:

Accurate cost basis tracking across all wallets
Automatic identification of taxable events
Tax-loss harvesting alerts and recommendations
Compliant tax forms for your jurisdiction

4. Consider Your Overall Tax Strategy

Tax-loss harvesting is one tool in a larger strategy:

Holding period: Long-term gains (assets held >1 year) are taxed at lower rates
Income timing: Consider which tax year to recognize gains
Charitable giving: Donating appreciated crypto can provide additional benefits
Retirement accounts: Some investors use self-directed IRAs for crypto

5. Prepare for Potential Retroactive Application

While unlikely, maintain documentation that would support your tax positions even if rules changed:

Keep records of your rationale for each transaction
Document why assets are not “substantially identical” if you swap into similar tokens
Maintain complete transaction histories indefinitely

6. Work With Crypto-Savvy Tax Professionals

Not all accountants understand crypto taxation. Find a professional who:

Has specific experience with cryptocurrency
Understands DeFi, staking, and complex transactions
Stays current on regulatory changes
Can represent you in case of an audit

Conclusion

The crypto wash sale loophole represents one of the most significant tax advantages available to cryptocurrency investors today. Unlike stock investors who must wait 31 days to repurchase sold assets, crypto investors can sell at a loss and immediately rebuy, capturing the tax benefit without any market timing risk.

However, this advantage won’t last forever. Legislative efforts to close the loophole continue, and it’s likely only a matter of time before wash sale rules apply to cryptocurrency. Smart investors are taking advantage now while carefully documenting their transactions for compliance.

Key takeaways:

The wash sale rule currently does not apply to cryptocurrency
This creates significant tax-saving opportunities through loss harvesting
Legislation to change this is likely within the next few years
Proper record keeping is essential regardless of current rules
Automated tax software makes compliance manageable

Ready to optimize your crypto taxes? Start your free trial with Awaken Tax and see exactly how much you could save through tax-loss harvesting. With support for the UK, Canada, Australia, and 55+ countries, plus 10,000+ supported protocols, Awaken handles even the most complex crypto portfolios.

Don’t leave money on the table. The crypto wash sale loophole is closing - make sure you take advantage while you still can.

Disclaimer: This article is for informational purposes only and does not constitute tax, legal, or financial advice. Tax laws vary by jurisdiction and are subject to change. Consult with a qualified tax professional for advice specific to your situation.

For a complete comparison of crypto tax platforms, visit our comparison page.