For years, cryptocurrency was exempt from the wash sale rule that applies to stocks and securities. You could sell Bitcoin at a loss, immediately buy it back, and claim the loss on your tax return. Under new legislation, that strategy is ending for digital assets.

The Traditional Wash Sale Rule

Under §1091, if you sell a stock or security at a loss and purchase a substantially identical stock or security within 30 days before or after the sale, the loss is disallowed. The disallowed loss is added to the cost basis of the replacement security. This rule prevents investors from generating artificial tax losses without actually changing their economic position.

Why Crypto Was Different

The IRS classifies cryptocurrency as property, not a security, under Notice 2014-21. The wash sale rule in §1091 applies to "stock or securities" — and property is neither. This created a loophole that crypto investors exploited extensively. You could sell Bitcoin at a loss on December 31, buy it back on January 1, claim the loss, and maintain your position.

The Rule Change

New legislation extends wash sale treatment to digital assets. Once effective, selling crypto at a loss and repurchasing substantially identical digital assets within the 61-day window will trigger wash sale disallowance. The loss will not disappear — it will be added to the cost basis of the replacement asset — but it will no longer be available in the year of the sale.

Impact on Tax-Loss Harvesting

The primary impact falls on active tax-loss harvesting strategies. Investors who routinely sold and repurchased crypto to generate losses will need to either wait 31 days before repurchasing (accepting price risk) or swap into a different digital asset that is not "substantially identical." Whether Bitcoin and a Bitcoin ETF are "substantially identical" will be a key interpretive question.

Planning Ahead

If you have been harvesting crypto losses without regard to the wash sale rule, review your strategy now. If you have prior-year returns that relied on wash-sale-eligible losses before the rule change, those returns are likely still valid under the law as it existed at the time of filing. Attorney Darrin T. Mish helps crypto investors navigate the evolving tax landscape — both for compliance going forward and resolution of past issues.