How to trade your crypto knowing there are no wash sale regulations (currently)
Everything you need to know in 2 minutes
A powerful tool at the disposal of the retail investor is to take advantage of the lack of wash-sale rules involving cryptocurrency transactions. Seeing that the crypto markets have plunged a lot over the past few months, we wanted to reintroduce this potential tax optimization strategy to you!
First, what are wash sale rules?
The wash-sale rule prohibits selling a security for a loss and replacing it with the same or a “substantially identical” security 30 days before or after the sale. The wash sale rule applies to stocks, bonds, mutual funds, ETFs, and options.
For example, if you bought stock $XYZ for $100, sold it for $90, and, within 30 days of selling, rebought it (regardless of price), you will not be allowed to recognize the $10 loss on Schedule D when filing your taxes. Instead, the $10 loss gets added back to the cost basis of the buy that triggered the wash sale.
The intent of the IRS and the government in implementing wash sale rules is to prevent the creation of “artificial” losses by trading in and out of stocks with the express purpose of harvesting capital losses.
Unfortunately, most, if not all, online brokerage accounts do not warn users about wash sales. Robinhood notoriously screwed one of its users into an $800,000 tax bill because of wash sales. Fortunately, Reconcile flags potential wash sales for you so you can avoid this mistake!
What does this mean for crypto?
As of today, there is no wash sale rule in place for cryptocurrencies. Therefore, you can theoretically sell your crypto and rebuy the same currency within 30 days without violating IRS rules. This strategy can help you accumulate capital losses to offset future capital gains. Keep in mind this could change with pending legislation, so be sure to keep a close eye on it. Also, try to avoid rebuying the same currency immediately as that can still run afoul of the Economic Substance Doctrine, which also prevents investors from realizing a capital loss if the only purpose is to harvest losses.
Also, your crypto activity is reflected on Schedule D when filing your federal taxes - the same schedule used for securities. So you're able to deduct your crypto losses from your stock gains!
Note - none of this should be considered professional investment advice. Chat with your accountant or advisor to see if this is the right strategy for you.
In case you want to chat with a professional, Reconcile offers a free matchmaking service, please fill out this form to learn more: https://airtable.com/shre0ZVAsZAjlyK8D.