Emily Clarke

What is the Wash Sale Rule in Crypto?

There are many ways to invest your money, but cryptocurrency is among the newest and most exciting. Crypto runs on the concept of decentralization. It's largely unregulated, resulting in much confusion about how to handle investments.

The IRS considered cryptocurrencies like Bitcoin and Ethereum as property. It's akin to the property you buy and stocks you invest. That means that you must pay capital gains during tax season when you make money and are allowed to deduct losses when you lose money. Mostly, the tax rules for crypto are the same as those with traditional stocks.

But there is one exception: The wash sale rule.

What are Wash Sales in Crypto?

In standard investing, the wash sale rule prevents you from deducting a loss from the sale of a security if you replace that security within 30 days. Typically, it applies when you replace the sold security with the same or substantially similar security.

The rule prevents investors from taking advantage of the system. It stops you from creating a loss for nothing but the tax deduction while still maintaining a position in the security. It's a good rule that helps ensure fairness across the board.

What are wash sales in crypto? They don't exist.

Wash sales apply to securities. Securities are regulated financial instruments with strict rules to protect investors. The wash sale rule is a great example of that.

But here's the thing about crypto: It's largely unregulated. It doesn't count as a security because it doesn't come with those protections. Crypto is more volatile, creating more risks. Because it's not a security, the wash sale rule doesn't apply. What are wash sales in crypto? Visit this website to know more.

What does that mean for crypto investors? It means you can sell coins during a market decline to protect your investment and reduce losses. When the price of those coins bottom out, you can immediately repurchase them and apply the losses against capital gains. The result is decreased taxable gains. Understanding that the wash sale rule doesn't apply is important because you can use it to your advantage to offset future gains.

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Emily Clarke writes about portfolio management, finance tracking and Consumer SaaS services. You can find her thoughts at financial tools blog.