Crypto Isn’t Subject to Wash Sale Rules—and That’s a Good Thing
Tax policy and cryptocurrency often intersect in fascinating and sometimes contentious ways, and one prime example is the ongoing debate over the application of the wash sale rules to digital assets. These rules, codified under section 1091 of the tax code, are a cornerstone of tax law for traditional securities, designed to curb tax-motivated sales. However, they currently do not apply to crypto assets—and that’s not a loophole; it’s a deliberate and defensible policy decision rooted in sound tax principles.
In this article, we’ll explore why the wash sale rules have traditionally excluded cryptocurrency, the implications of this policy for investors, and what changes—if any—might be on the horizon. By unpacking the legal and practical dimensions of this issue, we’ll show why preserving this approach is not just fair but necessary for the continued growth and utility of digital assets as both an investment class and a medium of exchange.
The Law
The wash sale rules generally deny losses on a sale of stocks or securities, or options to acquire stocks or securities, if you acquire substantially identical assets within 30 days.
Though "securities" aren't defined under the wash sale rules, they likely include only debt, consistent with tax code section 1236(c). If securities instead meant anything the SEC thinks is a security, Congress wouldn't have had to amend the rules in 1988 to include options.
Thus, even shares in BTC and ETH ETPs are unlikely to be subject to the wash sale rules. ETPs are grantor trusts for US tax purposes, meaning holders are treated as directly owning the underlying crypto, which is neither stock nor debt.
Policy
The wash sale rules don't apply to foreign currency or other commodities. That makes sense; many people use commodities for payments and have non-tax reasons to acquire them within 30 days of disposition. The wash sale rules are meant to address only tax-motivated sales.
Application to Crypto
Unlike stock, and like commodities, crypto often is used as a medium of exchange. People who spend crypto often acquire identical crypto within 30 days for non-tax reasons. As a policy matter, those taxpayers should not be subject to the wash sale rules.
Of course, many taxpayers (e.g., ETP investors) hold crypto long-term for speculation and harvest built-in losses at the end of the year. Arguably, the wash sale rules should apply to them. But that would require careful drafting to avoid punishing people who actually use crypto.
Tax Savings and Considerations for Crypto Investors
At this time, the wash sale rules do not apply to cryptocurrency. This has allowed crypto investors to claim capital losses when they sell and rebuy identical assets within 30 days, a strategy that has saved millions in taxes through loss harvesting. Because cryptocurrency is so volatile, some investors harvest their losses multiple times in a year, reducing their tax liability while re-entering the same positions quickly.
However, it’s worth noting that Congress may close this so-called “loophole” in the future. If that happens, any new rules would need to be carefully tailored to avoid penalizing those who use crypto as a medium of exchange rather than solely as an investment vehicle. Simply applying the wash sale rules to all crypto transactions without considering this nuance could create undue burdens on taxpayers engaging in routine transactions.
Conclusion
Don't call this a loophole. There are sound policy reasons not to apply the wash sale rules to commodities, including most crypto. Any future changes to the rules to apply to commodities and crypto should be narrowly tailored to capture only passive holders. For now, crypto investors can responsibly utilize loss harvesting strategies to manage their tax liabilities while staying informed about potential regulatory changes on the horizon.
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