IRS Crypto Wash Sale Rules for 2024

By Tynisa Gaines

Compiled by: TaxDAO

当有人表面上出售加密货币或证券以产生损失，并迅速重新购买相同或类似的加密货币或证券以获得税收优惠时，就会发生洗售。洗售规则禁止亏本出售证券并在 30 天内重新购买证券，以防止纳税人通过「人为」损失来降低纳税义务。

For U.S. taxpayers, there are no cryptocurrency wash sale rules, so cryptocurrency wash sales are technically legal. However, we recommend avoiding wash sales of cryptocurrency as lawmakers appear to be working to close this loophole.

What are cryptocurrency wash sale rules?

Tax-loss harvesting is a strategic tool to minimize tax liability by selling investments with unrealized losses. Through this method, investors can realize capital losses, which can help offset capital gains in other investments or ordinary income up to $3,000 per year.

A wash sale occurs when a holder sells a cryptocurrency or security at a loss and quickly repurchases the same or similar cryptocurrency or security to incur a capital loss. If a U.S. cryptocurrency user buys back their crypto assets immediately after selling, this is a cryptocurrency wash sale. Wash sale rules were created to prevent investors from incurring losses on assets they still hold. The easiest way to avoid the wash sale rule is to wait 30 days after selling an asset before buying it back. The problem with this is that the price could change in 30 days and the returns would not be the same.

The IRS prevents apparent securities transactions through wash sale rules. Although the IRS has not yet clearly outlined the applicability of the rule to cryptocurrencies, the growing interest of regulators and lawmakers suggests that regulations may be tightened to address known loopholes. Conservative, risk-averse investors are therefore advised to avoid cryptocurrency wash sales.

How do cryptocurrency wash sale rules work?

Losses from wash sales of stocks or securities are subject to the wash sale rules under 26 U.S.C. Section 1091, which means if your investment has lost value, you cannot repurchase it within 30 days of selling it to claim a loss. The rules prevent taxpayers from using "artificial" losses to offset their gains and reduce their capital gains tax liability.

The main point of the wash sale rules is that if an investor repurchases a substantially identical security or crypto asset within 30 days of the sale, capital losses are not allowed for tax purposes.

Here is an example of a cryptocurrency wash sale rule:

• On December 30, Aaron had a gain of $15,000 and a loss of $5,000, for a total gain of $10,000. He also holds 20 BNB with a cost basis of $10,000 but a current fair market value of $4,000.

• Aaron sells 20 BNB for $4,000, realizing a $6,000 capital loss.

• On January 5th, Aaron decided to buy 20 BNB for $4,200. This was 30 days after the sale.

• For tax purposes, Aaron reports a loss of $6,000 on 20 BNB in order to reduce his overall gain from $10,000 to $4,000. Due to the wash sale rules, his loss is disallowed for tax purposes. Therefore, he needs to pay tax on the $10,000 gain.

• Aarons' cost basis in the new securities was adjusted to reflect the disallowed losses.

• If he later decides to sell the new securities for a gain, the adjusted cost basis is used to calculate the taxable gain or loss.

How to Save Taxes Using Crypto Wash Sale Rules

The IRS wash sale rules do not currently apply to cryptocurrencies because it considers virtual currencies to be property rather than securities. This effectively means that there are no cryptocurrency wash sale rules at the time of writing. Technically, cryptocurrency wash sales are allowed. However, lawmakers and regulators say this may soon change.

In September 2021, a House Ways and Means Committee proposal included language to apply wash sale rules to digital assets, creating the cryptocurrency wash sale rule. While the “Build Back Better” bill has stalled in Congress, these developments highlight the administration’s interest in the matter.

Biden admitted in 2021 that the "Build Back Better" bill would not be passed by the end of the year, but he remained steadfast in his hope of passing it as soon as possible. In March 2022, President Biden signed the bill, calling on federal agencies to pay more attention to cryptocurrency wash sales. This series of events shows that federal agencies are moving quickly to change legislation regarding cryptocurrency wash sales.

How do wash sale rules affect my tax bill?

The purpose of cryptocurrency wash sales is to minimize tax liability by reducing capital gains. By washing crypto, you can pay less tax. However, as mentioned above, this loophole can be closed, so we strongly recommend avoiding wash sales.SafetyThe following strategies can effectively achieve the same goal:

• By repurchasing the crypto asset after the 30-day period, your actions will no longer be classified as wash trades and will avoid any future cryptocurrency wash sale rules (assuming the rules are the same as current securities rules).

• You can exchange a depreciating asset for one that is closely correlated with its priceTokenYou will hold the relevantTokenOver 30 days, then repurchase the original assets.

Changes to wash sale rules and their impact on investors

If the cryptocurrency wash sale rules change, it could have a significant impact on cryptocurrency investors. Changes to the rules would affect the strategies some investors use to manage their portfolios and minimize tax liabilities. If the wash sale rules are expanded to include cryptocurrencies, investors will need to re-evaluate their trading practices and consider waiting longer before repurchasing assets after a sale to avoid potential penalties. Regardless, we recommend avoiding cryptocurrency wash sales.

Changes to the wash sale rules may also increase scrutiny from tax authorities and regulators. Investors should stay abreast of any changes to the rules and proactively adjust their tax strategies.

How do I know which of my assets are currently losing money?

Determining which of your assets are currently losing money is an important aspect of effectively managing your cryptocurrency portfolio. To identify underperforming assets, you can regularly track the market value of each crypto asset based on its initial cost basis. Using specialized cryptocurrency tax software can simplify this process by providing a comprehensive overview of your portfolio's performance and identifying assets that are currently trading at a loss.

Regularly reviewing your portfolio and evaluating individual asset performance using tools like Zerion allows you to make informed decisions, such as tax losses or strategic asset reallocations. By staying vigilant and utilizing the tools available to you, you can optimize your investment strategy and reduce potential losses in the dynamic and volatile cryptocurrency markets.

Is Crypto Wash Trading Legal?

Wash trading in cryptocurrency markets involves artificially inflating trading volumes by executing buy and sell orders for the same asset with the goal of creating misleading market activity.

As of now, wash trading is generally frowned upon by regulators. However, the legality of wash trading in the cryptocurrency space may vary by jurisdiction. While wash trading is technically legal for U.S. cryptocurrency users, we advise against it as legislation could change this.

Cryptocurrency Wash Sales FAQs

Here are answers to some frequently asked questions about cryptocurrency wash sale rules.

1. Is the cryptocurrency wash sale rule 30 days?

If you purchase the same asset within 30 days of the sale, you cannot claim a capital loss on the security. Therefore, based on current IRS guidance, it is reasonable to assume that the wash sale rules do not apply to cryptocurrencies.

2. Will the wash sale rules continue into next year?

Yes. If you sell an asset and reacquire it within 30 days, this is considered a cryptocurrency wash sale, regardless of whether the sale extends into the next calendar year. So if you sell on December 15th and buy it back on January 1st, this is considered a wash sale.

3. Can wash sales still be performed using cryptocurrencies?

Technically, yes, there are currently no crypto wash sale rules. However, the Biden administration has begun to look more closely at crypto cases, and it is likely that the loopholes that currently allow crypto wash sales will soon be closed, making crypto wash sales illegal.

4. How do I know which of my assets is currently in a losing trade?

The only way you can understand your overall portfolio performance is by tracking all cryptocurrency profits and losses.

5. The future of cryptocurrency wash sales rules

Changes to the rules on cryptocurrency wash sales can be reasonably expected given recent developments in cryptocurrency regulation, including the signing of the “Build Back Better” Act, which takes effect in March 2022. The legislation authorizes federal agencies to pay more attention to cryptocurrency wash sales, signaling a growing interest in the cryptocurrency space and a potential regulatory shift.

As the Biden administration expresses interest in crypto cases and investigations become more rigorous, the legal status of crypto wash sales may change soon. Therefore, caution is advised. Stay tuned for updates and proactively adjust your strategy as the regulatory environment changes.

6. Can you sell cryptocurrency at a loss and buy it back later?

Yes, you can sell cryptocurrencies at a loss and buy them back at any time. When a trader does this quickly to avoid tax losses, wash sale rules apply.SafetyThe best way is to wait 30 days from the date of sale before buying.

7. How to bypass wash sale rules?

The easiest way to get around the wash sale rules is to wait 30 days after selling an asset before buying it back. The IRS wash sale rules state that if a trader sells a security at a loss and then buys it back within 30 days, the initial loss cannot be claimed for tax purposes.

8. Are wash sales of losses not allowed in cryptocurrencies?

As of the time of writing, there are no active cryptocurrency wash sale rules for U.S. taxpayers, and cryptocurrency wash sales are technically legal. However, this is expected to change as legislation is introduced.

The article comes from the Internet:2024 IRS Xiaobai NavigationCryptocurrency wash sales rules

Related recommendations: Sell or hold? Data reveals Wormhole TokenCorrect operation of airdrop

Wormhole is a leading interoperability provider, especially in the non-EVM field. Written by: ze小白导航rokn0wledge Translated by: 小白导航coderworld Recently, Wormhole successfully launched $W, which is definitely a huge event. With a FDV of $10 billion, it is currently…