Last Updated: September 14, 2021
The House Committee on Ways and Means is planning to subject cryptocurrencies to the wash sale rule according to a summary report published on September 13, 2021. Congress expects to find more tax revenue by closing down this loophole that crypto holders have been enjoying for years.
What is a Wash Sale?
According to §1091 of the IRS code, a wash sale occurs when an individual sells a stock or security at a loss, and, within 30 days before or after this sale, buys a “substantially identical” stock or security (or acquires a contract or option to do so). This code section exists to prevent stock traders from claiming phantom tax losses.
Currently, only stocks and securities are subject to the wash sale rule. Since the IRS treats cryptocurrency as property, they are not subject to the wash sale rule at the moment. This loophole allows savvy crypto holders to harvest tax losses more aggressively in crypto than stocks. For example, crypto users can use CoinTracker today to identify losses by cryptocurrency, sell them, and immediately buy them back realizing capital losses, saving money, and maintaining the same portfolio. This technique can further be used to offset capital gains outside of cryptocurrency (e.g. with stocks), and even against certain amounts of ordinary income.
How Wash Sales Work for Stocks & Cryptocurrency Today
Assume Jennet buys a share of Google stock for $2,000 on January 10, 2021. On January 15, 2021, Google stock is trading at a much lower price of $1,200 per share. If Jennet were to sell her position and buy another share at $1,200, she would NOT be able to claim the capital loss of $800 ($2,000 - $1,200) due to the wash sale rule. Therefore, an $800 loss is disallowed under the wash sale rule.
Substitute Google stock with bitcoin (BTC) or any other cryptocurrency. Here, Jennet would be able to claim the $800 loss as a capital loss because cryptocurrencies are not subject to the wash sale rule.
The Ways and Means Committee Proposal for Crypto Wash Sales
Sec. 138153 of the Ways and Means summary document plans to subject digital assets to wash sale rule.
“This section includes commodities, currencies, and digital assets in the wash sale rule, an anti-abuse rule previously applicable to stock and other securities. The wash sale rule in section 1091 prevents taxpayers from claiming tax losses while retaining an interest in the loss asset”
How to Apply the Proposed Wash Sale Rule to Cryptocurrency
Assume Jennet’s BTC transaction in the above example was subject to the wash sale rule. In this case, Jennet would not be able to deduct the $800 capital loss on her taxes. Instead, she would increase the basis of her BTC to $2,000 ($1,200 + $800).
Say she later sells this coin for $10,000. In this case, she would report an $8,000 ($10,000 - $2,000) gain while accounting for the $800 loss disallowed under the wash sale rule. (If she doesn't increase the cost basis by the disallowed wash sale loss, she would incorrectly incur a higher capital gain of $8,800 ($10,000 - $1,200).
If the Ways and Means Committee’s suggestions are accepted, cryptocurrency trades after December 31, 2021, will be subject to the wash sale rule. Before this date, you can use CoinTracker to tax loss harvest without being subject to the wash sale rule.
After December 31, 2021, it will be your responsibility to accurately track wash trades and adjust cost basis accordingly to comply with the new rules. To make your life easier, CoinTracker is prepared to support automatic wash trade tracking across multiple exchanges and wallets and cost basis adjustments under the new guidance.
CoinTracker is closely monitoring the developments in the regulatory space, along with the Infrastructure bill provisions.
If you have any questions or comments about crypto taxes let us know on Twitter @CoinTracker.
CoinTracker integrates with 300+ cryptocurrency exchanges, 8,000+ blockchains, and makes bitcoin tax calculations and portfolio tracking simple.
Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.