The IRS Wash Sale Rule And Cryptocurrencies

If I fell off tomorrow would you still love me?

If I didn't smell so good would you still hug me?

If I got locked up and sentenced to a quarter century

Could I count on you to be there to support me mentally?

If I went back to a hoopty from a Benz, would you poof and disappear

Like some of my friends?

-21 Questions by 50 Cent

I have one client that asks me a million questions. I have no problem with the volume of questions from this client. One day this client asked me about wash sales. In my mind, I thought my client was going to talk about stock sales. However, to my surprise, the question was regarding my client’s cryptocurrency transactions. My client asked me “does the wash sales rule apply to cryptocurrencies?” Just in case you were wondering, the wash sale rule was designed to discourage people from selling securities at a loss simply to claim a tax benefit. A wash sale occurs when you sell a security at a loss and then purchase that same security or “substantially identical” securities within 30 days (before or after the sale date). If such a transaction does take place, the loss on the sale is disallowed, though investor is allowed to increase the basis in the new investment by the otherwise-disallowed loss (which means the loss isn’t itself permanently lost, but simply deferred to the future). In this article what was my response to my client’s question.

To end any suspense, I told my client that I don’t know the answer and to find a better tax accountant. OK, the previous sentence was to check if you are paying attention. I got three young kids and a wife; I can’t fire my clients! My actual response was “Cryptocurrencies does not fall within the strict statutory prohibition on wash sales of stock or securities.” Wash sales are prohibited by Section 1091 of the Internal Revenue Code. Section 1091 does not apply to cryptocurrency. The IRS treats cryptocurrency assets as property

Cryptocurrencies does not fall within the strict statutory prohibition on wash sales of stock or securities. Because the wash sale rule does not apply based on the express language of the statute, cryptocurrency investors can probably claim capital losses from coins they sold and repurchased within 61 days.

Did you notice in the previous sentence that I used the word “probably?” Always remember that the IRS is still forming the cryptocurrency rules. The IRS can always change this rule. Section 1091 does allow the IRS to expand the “stock or securities” that trigger the wash sale rule. If the IRS passes a regulation clarifying that Bitcoin and other cryptocurrencies do fall under the jurisdiction of Section 1091, wash sales may be disallowed. For this reason, it is best to be conservative in your tax reporting. When the IRS is in the process of creating rules, it is best to play it safe.

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