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Many investors are wondering if wash sales apply to cryptocurrency. The answer is a bit complicated, but essentially, the rule applies to any security
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Introduction
A wash sale is a sale of a security at a loss followed by the purchase of a “substantially identical” security within 30 days. The term “substantially identical” is open to interpretation, but the general idea is that the securities are similar enough that they don’t provide the investor with true diversity. For example, selling stock in one company and then buying stock in a different company in the same industry would probably not be considered a wash sale.
Wash sales are significant because they can potentially negate capital losses. If an investor realizes a capital loss on the sale of a security, they can typically use that loss to offset other capital gains or income. However, if the IRS determines that the sale was part of a wash sale, the loss is not allowed to be deducted.
The wash sale rules were originally designed for stocks and other traditional securities, but there has been some debate about whether or not they apply to cryptocurrency. After all, cryptocurrency is still a relatively new asset class and it doesn’t necessarily fit neatly into existing regulations.
That said, it’s generally believed that wash sale rules do apply to cryptocurrency. In September 2018, the IRS issued guidance confirming that wash sales can apply to cryptocurrency transactions.
What is a Wash Sale?
A wash sale is a sale of a security (or any financial instrument) at a loss, followed by a purchase of the same or substantially identical security within 30 days before or after the sale. The wash sale rule was created to prevent taxpayers from taking advantage of losses in order to reduce their tax liability.
The wash sale rule applies to stocks, bonds, and other securities, as well as cryptocurrency. If you sell cryptocurrency at a loss and then buy it back within 30 days, you cannot claim the loss on your taxes. Instead, the loss will be added to the cost basis of the newly purchased cryptocurrency, which will affect how much tax you owe if you sell it at a later date.
Since the wash sale rule only applies to losses, if you sell cryptocurrency at a profit and then buy it back within 30 days, you can claim the gain on your taxes. However, if yousell cryptocurrency and then buy it back within 30 days at a loss, you cannot claim the loss on your taxes.
If you have any questions about whether or not the wash sale rule applies to your situation, please contact a tax professional.
Does a Wash Sale Apply to Cryptocurrency?
Wash sales are designed to prevent investors from claiming losses on securities they do not actually sell. The rule prohibits investors from selling a security for a loss and then promptly buying the same or “substantially identical” investment. If the investor does this, the IRS will disallow the loss.
This rule applies to stocks and other securities, but it is not clear if it applies to cryptocurrency. The Internal Revenue Service has not issued any guidance on the matter, so it is unclear how they would treat a wash sale involving cryptocurrency.
However, given the similarities between cryptocurrency and other securities, it is likely that the wash sale rule would apply to cryptocurrency if the IRS were to issue guidance on the matter. If you are planning on sellingcryptocurrency for a loss and buying it back shortly afterwards, you should be aware that you may not be able to claim the loss on your taxes.
How to Avoid a Wash Sale
A wash sale is a sale of securities followed by the purchase of substantially similar securities. The sale and purchase occur so close together in time that the IRS considers them to be part of a single transaction.
Wash sales are not prohibited. However, they can have negative tax implications because they cancel out your capital gains (or losses). This can be disadvantageous if you sell an asset at a profit and then buy it back at a lower price, because you will not be able to claim the capital gain.
To avoid a wash sale, you must wait at least 30 days before repurchasing the same or substantially similar security. If you buy the security before the 30-day period is up, the IRS will disallow your capital loss and add it to the cost basis of the new security.
For example, let’s say you bought shares of XYZ stock for $1,000 on January 1 and sold them on February 1 for $1,200, realizing a $200 capital gain. On February 2, you bought shares of XXY stock for $1,100. Because XXY is substantially similar to XYZ, this would be considered a wash sale. The $200 capital gain from the sale of XYZ would be disallowed, and your cost basis in XXY would be increased to $1,300 ($1,100 + $200).
Conclusion
When it comes to cryptocurrency, the question of “do wash sales apply?” is a valid one. After all, if you’re buying and selling cryptocurrency on a regular basis, it stands to reason that you might want to take advantage of any tax breaks that might be available.
However, as of right now, it does not appear that wash sales apply to cryptocurrency. This is because, as the IRS states, a wash sale occurs when “you sell or trade stock or securities at a loss and within 30 days before or after the sale you:
-Buy substantially identical stock or securities.”
Cryptocurrency is not currently considered to be a security orstock, so it does not appear that wash sales can be used to claimlosses on cryptocurrency transactions.
