September 6, 2022

Currently, crypto is not subject to wash sale rules. Thus, a person can sell their crypto today, recognize the loss, and repurchase the same crypto tomorrow.

Under IRC Section 1091-loss from wash sale of stock and securities (a) Disallowance of loss deduction; “In the case of any loss claimed to have been sustained from any sale or other disposition of shares of stock or securities where it appears that, within a period beginning 30 days before the date of such sale or disposition and ending 30 days after such date, the taxpayer has acquired (by purchase or by an exchange on which the entire amount of gain or loss was recognized by law), or has entered into a contract or option so to acquire, substantially identical stock or securities, then no deduction shall be allowed under section 165….” Thus, if you sold security and repurchased within 30 days the loss would be disallowed. However, crypto is viewed as property, and the wash sale rules do not apply. The build back better bill was going to include a provision to expressly address this and have crypto fall under these provisions (or something similar) however, the bill did not become law. In addition, the current Inflation Reduction Act (signed into law on August 16, 2022) does not include provisions for crypto or digital assets. Currently, crypto is still not subject to the wash sale rules. This allows someone the ability to sell digital assets today and recognize the loss, then repurchase and hold the same assets tomorrow (“loss harvesting”).

Example:

John bought 1 BTC in May 2021 for $33,000. He noticed the price of BTC drops to $30,000 and sold his 1 BTC. He will have a capital loss of $3,000. He then uses the $30,000 to purchase another BTC and holds it. In addition, John has also invested in ETH this financial year. He bought 1 ETH for $2,000 and later sold it. The price of ETH is $4,000 on the day he sells. He has a capital gain of $2,000. John can use his capital loss from BTC to offset his capital gain from ETH – so he’ll pay no Capital Gains Tax on his gain from ETH. He also has another $1,000 capital loss leftover which he can offset against gains this year or even carry over into future financial years to offset against future gains.

Please note the capital gain and loss rules still apply. As such, capital losses can be used to offset capital gains in any amount. However, capital losses can only offset other income by $3,000 (unless married filing separately, then the limit is $1,500).

For additional information regarding crypto and its tax implication, please reach out to your Topel Forman contact.