Crypto Wash Sales: Are New Tax Rules Closing the Loophole?​

As of May 1, 2025, the Internal Revenue Service (IRS) continues to classify cryptocurrencies as property, not securities. This distinction means that the traditional "wash sale" rule, which disallows claiming a tax deduction for a loss on a security sold and repurchased within 30 days, does not currently apply to digital assets like Bitcoin and Ethereum. ​

This regulatory gap has allowed crypto investors to engage in tax-loss harvesting strategies, selling digital assets at a loss to offset capital gains and then quickly repurchasing them without waiting 30 days. Such practices have been legal and widely used, offering a tax advantage not available in traditional securities markets. 

However, the landscape is poised for change. In March 2024, the Biden administration proposed extending the wash sale rule to cover digital assets in its fiscal year 2025 budget. The proposal aimed to align cryptocurrency tax treatment with that of stocks and bonds, potentially closing the existing loophole. 

How does the Wash Sale law work for stocks?

The wash sale rule, codified in Section 1091 of the Internal Revenue Code, is a tax regulation designed to prevent investors from claiming artificial losses on securities sales. It stipulates that if an investor sells a security at a loss and repurchases the same or a "substantially identical" security within 30 days before or after the sale, the loss is disallowed for tax purposes. This rule applies to a wide range of securities, including stocks, bonds, mutual funds, exchange-traded funds (ETFs), and options.

The primary purpose of the wash sale rule is to prevent taxpayers from exploiting tax deductions without genuinely altering their investment positions. By disallowing the immediate deduction of losses on such transactions, the rule aims to ensure that tax benefits are only realized when there is a substantive change in the investor's economic position.

It's important to note that while executing a wash sale is not illegal, claiming a tax deduction for a loss from such a sale is prohibited. If a wash sale occurs, the disallowed loss is added to the cost basis of the repurchased security, effectively deferring the tax benefit until the new security is sold in a non-wash sale transaction.

Investors can avoid triggering the wash sale rule by waiting at least 31 days before repurchasing the same or substantially identical security. Alternatively, they can purchase a different security that is not considered substantially identical, thereby maintaining their investment strategy without violating the rule.

So what’s happening in crypto?

Despite the proposal to align crypto with stock laws, as of now, no legislation has been enacted to apply the wash sale rule to cryptocurrencies. President Donald Trump has embraced cryptocurrencies as a central component of his administration's economic strategy. This shift was underscored by his March 2025 executive order establishing a Strategic Bitcoin Reserve and a broader U.S. Digital Asset Stockpile, positioning the United States as the largest known state holder of Bitcoin with approximately 200,000 BTC . Trump's vision extends beyond mere accumulation; he has articulated a goal of making America the "crypto capital of the world," advocating for policies that foster innovation and reduce regulatory barriers . His administration has also signaled a more accommodating stance toward crypto-related activities, with federal agencies easing restrictions on banks engaging in cryptocurrency services and the Department of Justice disbanding its National Cryptocurrency Enforcement Team . These moves have been met with enthusiasm from industry leaders, who view the administration's approach as a catalyst for growth and a potential model for integrating digital assets into national economic frameworks.

What does this mean for individuals?

Investors should be aware that while the wash sale rule doesn't currently apply to crypto, the current stance by the IRS may disallow losses if transactions lack economic substance. This means that if a transaction is deemed to have no genuine economic purpose beyond tax avoidance, the IRS could challenge the deduction. ​

In light of these developments, crypto investors are advised to stay informed about potential legislative changes and to consult tax professionals when engaging in tax-loss harvesting strategies. The evolving regulatory environment underscores the importance of compliance and the need for careful tax planning in the dynamic world of digital assets.