As 2021 draws to a close, cryptocurrency investors must examine their portfolios and assess the capital gains realized throughout the year. Unlike traditional stocks, where the wash sale rule restricts investors from selling at a loss and immediately repurchasing the same security, no such regulation currently applies to cryptocurrency. This is because the IRS classifies crypto as property rather than a security.
Under the existing wash sale rules for securities, investors are prohibited from claiming a tax deduction if they sell a security at a loss and then repurchase a “substantially identical” asset within 30 days before or after the sale. However, cryptocurrency investors have so far been able to bypass these restrictions.
This loophole is likely coming to an end. If the Build Back Better Act—already passed by the U.S. House of Representatives on November 19, 2021—is approved by the Senate and signed into law, cryptocurrencies would fall under the same wash sale regulations as stocks. The Joint Committee on Taxation estimates that closing this loophole would generate approximately $16.8 billion in tax revenue over the next decade.
With the potential shift in crypto tax rules, investors must act quickly. Reviewing your current holdings, harvesting tax losses, and planning trades strategically could help offset this year’s gains before the window closes.
With the Build Back Better Act still stalled in Congress, no official changes to the crypto wash sale rule have been finalized yet. Investors should stay alert, as legislative developments could impact crypto tax strategies at any time.
Is wash trading in crypto legal?
Wash trading in the cryptocurrency market refers to the practice of artificially inflating trading volumes by simultaneously placing buy and sell orders for the same asset. This creates a misleading impression of market activity and can distort prices and investor sentiment.
Currently, regulatory authorities widely view wash trading as deceptive, although its legal status within the crypto space varies by jurisdiction. In the United States, wash trading in crypto is technically legal for now, primarily because digital assets are not yet classified as securities. However, investors should exercise caution. Future legislation could soon bring stricter rules, making wash trading a risky and inadvisable practice.
Frequently Asked Question
What is the crypto wash sale rule loophole?
The crypto wash sale rule loophole refers to the ability of cryptocurrency investors to sell assets at a loss and immediately repurchase them without triggering wash sale restrictions that apply to stocks and securities.
Why doesn’t the wash sale rule currently apply to cryptocurrency?
The IRS classifies cryptocurrency as property rather than a security, which exempts it from the traditional wash sale rules that govern stocks, bonds, and similar financial instruments.
How do crypto investors benefit from the wash sale loophole?
Crypto investors can realize tax losses by selling assets at a loss and instantly repurchasing them, allowing them to reduce taxable income without altering their investment positions.
What legislation threatens to close the crypto wash sale loophole?
The Build Back Better Act, if passed by the U.S. Senate and signed into law, would subject cryptocurrencies to the same wash sale rules currently applied to securities.
How much revenue could closing the crypto wash sale loophole generate?
According to the Joint Committee on Taxation, applying wash sale rules to crypto could raise approximately $16.8 billion in additional tax revenue over the next decade.
When will the crypto wash sale rule change take effect?
If the Build Back Better Act is enacted, the new crypto wash sale rules would likely take effect at the beginning of the following tax year. However, as of early 2022, the legislation remains in limbo.
What should crypto investors do before the loophole closes?
Investors should review their crypto portfolios, harvest any unrealized losses to offset 2021 gains, and develop a proactive crypto tax strategy before any legislative changes are finalized.
Conclusion
The closing of the crypto wash sale rule loophole marks a pivotal shift for cryptocurrency investors. For years, the classification of crypto as property allowed traders to harvest losses without the restrictions faced by stock investors. However, with legislation like the Build Back Better Act on the horizon, this advantage may soon disappear.
Now is the time for crypto investors to act strategically—reviewing portfolios, capturing tax losses, and preparing for a more tightly regulated environment. Staying informed and working with qualified tax advisors will be critical to navigating these changes successfully. As the window on the crypto wash sale loophole closes fast, proactive planning can make all the difference between missed opportunities and optimized outcomes.