Skip to main content

Virtual Currency Trading: The wash sale tax tip that every crypto trader should know

cryptocurrency, bitcoin, BTC, ethereum, crypto tax help, crypto tax tips, wash sale crypto, crypto tax billAs virtual currency trading and ownership continues to grow, the U.S. regulatory policies and guidance remain vague, confusing, and inconsistent. However, based on current law, tax planning methods exist to help you lower your crypto tax bill. In the current regulatory environment, a tax loophole, or a tax planning strategy to legally reduce your tax liability, exists for crypto traders. The tax strategy focuses on the applicability of the Wash Sale rule as it relates to trading cryptocurrencies. It is important to note that the regulatory environment surrounding virtual currency is rapidly evolving, and so, crypto traders should remain up to date on newly released crypto guidance and policy.

Below, I will detail the wash sale rule as it relates to trading crypto as well as explain the tax strategy for lowering your cypto tax bill. Every crypto trader should know the wash sale tax tip.

Related Posts
- Cryptocurrency Taxation: How does the U.S. tax cryptocurrency?
Tax guidance on virtual currency transactions
Gambling Winnings & Losses: How to report gambling income and losses
File your taxes online for free: The IRS Free File Program Explained

What is a wash sale?

The wash sale rule exists to prevent taxpayers from creating artificial tax losses from the sale of stock and securities. The IRS established the tax guidance to prevent a tax deduction for a security sold in a wash sale. The guidance defines a wash sale as a sale that occurs when a taxpayer sells or trades a security (includes stocks and other items defined as securities) at a loss, and within 30 days before or after the sale (creating a 61-day window), buys the same or substantially identical security. As a result, the wash sale rule prevents the taxpayer from recognizing and deducting a capital loss on the sale of the security. It is important to note that the wash sale rule does not apply to capital gains.

How does the wash sale rule apply to cryptocurrency?

Section 1091 of the IRC governs the wash sale rule. The code section specifically applies to stock and securities; therefore, the wash sale rule does not apply to other types of assets, such as property. Currently, cryptocurrencies are treated as property. The Securities and Exchange Commission (SEC) utilized the Howey Test to determine whether or not cryptocurrencies should be treated as a security. Overall, SEC determined that virtual currencies, including Bitcoin and Ethereum, are not securities. However, the SEC does consider initial coin offerings and other cryptos as securities. It is important to confirm the cryptocurrency asset classification before participating in crypto trading.

So, to answer the question, experts believe that the wash sale rule does not apply to cryptocurrency. IRS guidance does not explicitly confirm the validity of this crypto trading tax tip, but experts believe the current crypto tax guidance allows for the cryptocurrency wash sale exception.

What is the crypto trading tax tip?

Because cryptocurrencies are treated as property, crypto trading has a major tax advantage over traditional security trading. It is important to note that this crypto tax advantage only applies to casual traders. Full-time traders face different rules and should ignore this post.

The best way to describe the tax strategy is via an example. So, on December 1, you buy 1 BTC for $10,000. On December 15, the 1 BTC is now trading at $8,000. You sell the BTC at this price, generating a $2,000 capital loss. Additionally, you buy back 1 BTC shortly after, reestablishing your cryptocurrency position.

If the IRS considers cryptocurrency a security, the wash sale rule applies to the example; therefore, you cannot recognize or net the capital loss on your tax return. However, because the IRS classifies the virtual currency as property, the wash sale rules does not apply to the example; therefore, you can recognize the capital loss on your tax return. It is important to note that capital losses can offset capital gains. So, you can offset capital gains generated from cryptocurrencies, stocks, or other capital assets. Additionally, if you have a net capital loss position (realized capital losses exceed realized capital gains), you may deduct up to $3,000 capital loss on your tax return.

This is a great crypto tax strategy to implement throughout the year, using it at times when your cryptocurrency position decreases in value. However, like any tax strategy, there is risk involved. As I mentioned above, the regulatory nature of cryptocurrency is evolving and expanding. At any moment, the IRS can change the rule, causing the wash sale rule to apply to cryptocurrency under Section 1091. It is conservative to assume the IRS will eventually release guidance to disallow wash sales of virtual currency. Until then, you can take advantage of the cryptocurrency wash sale exception tax strategy.

Please share with others to help them learn about the wash sale tax tip every cryptocurrency trader should know about. As always, please comment below or connect with via my contact page if you have any questions relating to the virtual currency trading tax tip.

Disclaimer: As stated in my disclaimer page, this post and all posts on Textbook Tax are informational only and are not intended as tax advice. For tax advice, please consult a tax professional.


  1. I just revealed your blog and expected to discover that I even have respected dissecting your blog segments. Grateful for the essential data. How to buy cryptocurrency in Canada

  2. cryptocurrencies have invested more resources to ensure their mass adoption, with some focusing on the applicability of their cryptocurrency to pressing personal life issues, as well as crucial day-to-day cases, with the intention of making them indispensable in everyday life. bch cardano

  3. Thanks for a very interesting blog. What else may I get that kind of info written in such a perfect approach? I’ve a undertaking that I am simply now operating on, and I have been at the look out for such info. referral

  4. Thank you because you have been willing to share information with us. we will always appreciate all you have done here because I know you are very concerned with our. Bitcoin Los Angeles

  5. You have done a good job by publishing this article about virtual currency trading. I appreciate your efforts which you have put into this article, It is a beneficial article for us. Thanks for sharing such informative thoughts. best cryptocurrency to invest in 2021 High

  6. Recently I read your blog and it was very good. I'm really impressed with this blog. This content was really appreciating. Thanks for sharing this type of blog file taxes

  7. Thanks for sharing the best information and suggestions, it is very nice and very useful to us. I appreciate the work that you have shared in this post. Keep sharing these types of articles here.
    cwg markets

  8. Thank you for putting all these strategies into a very readable place. It shows your ability and great skills. keep sharing such article in future. Crypto Coin Online Trading Platform

  9. The first prize winner will receive a prize of Rs. 12 crore (120 million). The second prize is Rs. 10 lakhs (1 million) and the third prize is Rs. 5,000. You can check the kerala lottery result today jackpot result today online at the Kerala State Lotteries website. The website will also post a list of the winning ticket numbers and the winners' names.


Post a Comment

Popular posts from this blog

Gambling Winnings & Losses: How to report gambling income and losses

People love to gamble.  During the past NFL Super Bowl (2019),  gamblers wagered approximately $146 million in Nevada’s sports books, which fell short of the record set the year before of $159 million. The gambling industry continues to grow as U.S. legislation becomes less restrictive relating to the gambling industry.  Because of the size of the gambling market, the IRS set forth guidance to control the tax treatment of gambling winnings and losses. I will discuss income and losses, record keeping, reporting forms, and special rules. If you participate in gambling activities, it is important to know the unique personal tax rules. The term 'gambling' applies to a wide range of activities, including: sports betting, casino games, lotteries, etc. You will need to follow the established gambling tax rules when reporting winnings and losses from gambling activities. Related Posts IRA Income: Must know tax rules relating to your IRA Are your income items taxable? Gamblin

Cryptocurrency Taxation: How does the U.S. tax cryptocurrency? - Textbook Tax

The cryptocurrency market continues to rise in popularity in the U.S. and throughout the world. The decentralized finance ("Defi") sector has seen massive growth. Additionally, ease of access has increased as new and established companies offer crypto services and exchanges. As more and more individuals and institutions adopt cryptocurrency, it becomes more important for people to understand the tax laws and regulations governing the cryptocurrency industry. It is important to note that each country views and regulates virtual currency differently.  The scope of this article covers the crypto tax laws in the United States.  T he IRS defines virtual currencies as  digital representations of value that function as mediums of exchange, units of account, and/or stores of value. Further, t he U.S. views crypto as property subject to capital gains and losses for US federal tax purposes. Based on its designation as property, i n general, there are four taxable events when dealing an

20 Tips & Tricks for Studying for the CPA Exam

For those on the way to becoming a certified public accountant, you now know it is a long and difficult journey. For those just beginning, good luck! The most difficult and time-consuming task is passing the CPA Exam. CPA candidates must spend hundreds of hours preparing for all four sections of the CPA. Each CPA section represents an entirely different topic, creating a daunting task for anyone looking to start studying for the CPA exam. I passed all four sections of the CPA with an average score of 91. Luckily, I did not have to retake any of the exams, which is a common occurrence as the average passing rate is around 40-50% per exam. Having personal experience dealing with the CPA exam process, I want to share valuable tips for conquering the CPA exam. I want you to feel confident and comfortable during the CPA exam process, and so, I believe the following tips will help you during the CPA exam process. Lets begin! Related Posts -  Preparing for the CPA Exam: How to Study