The Closing Window on the Current Crypto Wash Sale Rule Loophole

As 2021 comes to an end, it is crucial for investors in cryptocurrency (“crypto”) to revisit their portfolios and the capital gains they have realized during the year. Unlike stocks, where wash sale rules prevent a taxpayer from selling a security at a loss and immediately buying that same stock back, currently, no such rule applies to crypto, as the IRS classifies crypto as property and not a security.

The current wash sale rules regarding securities preclude investors from claiming a deduction when they sell a security at a loss if they buy a “substantially identical” asset within 30 days before or after the sale.

This current loophole for crypto investors is scheduled to end if the “Build Back Better Act” is passed by the Senate and signed into law (the U.S. House of Representatives passed the bill on November 19, 2021). According to the Joint Committee on Taxation, it is estimated that subjecting crypto to wash sale rules would raise $16.8 billion over the next decade.

Given the potential change to the wash sale rules, it will be important to review your holdings and trading activities to capture losses to offset gains from the current year, as the window to do so may be quickly closing.

*As of February 2022, with Build Back Better legislation in limbo, there is no outcome yet for this wash sale rule loophole.