The crypto wash sale rule has made many peope curious. Did you know that the IRS classifies virtual cryptocurrencies like Ethereum, Bitcoin, and Dogecoin as property?
It started on September 20, 2022, and it signifies that crypto is now following the same rules as stocks and bonds. Meaning you pay tax if you sell, spend, exchange, or convert crypto for more than it costs you.
However, there is also a big difference between cryptocurrency and stocks and bonds. Crypto is free of one rule that applies to financial securities: the wash sale rule. Financial securities are designed to protect and regulate financial instruments with rules to protect investors.
What is the wash sale rule?
The wash sale rule prevents you from buying back your investment after you sold it and lost money from it. You can only buy back your investment after 30 days have passed. You also have to get rid of your investment for 30 days so you can get the loss. Otherwise, the loss is not accounted for and will get added as a new purchase that you make.
What it means for crypto holders
Now, cryptocurrency is mostly unregulated, so it isn’t a security. Therefore the wash sale rule does not apply here. What this means for you is that you still follow the same trading rules when it comes to cryptocurrency, just as you would with precious metals or other real currencies.
The good news is that the absence of the crypto wash sale rule allows you to sell your coins during market declines to reduce your losses. You can also buy back the same coins when the prices reach the lowest point. This is useful, considering cryptocurrency is volatile.
You can also apply your losses when selling your coins to lower taxable profits. These losses can accumulate over the years and be accounted for toward future gains.
For some people, this may be a temporary tax loophole. You can take advantage of this fact. However, keep in mind that the rules may change anytime.