What Is the Crypto Wash Sale Rule?

The cryptocurrency market has always been characterized by wild up-and-down swings. However, the current market decline that started in November 2021 is the most profound crypto bear market ever as measured by the total value lost — $1.8 trillion, and counting.

Gone are the days when you could simply sit back and rely on your Bitcoin investment to grow over time. In this environment, investors need to look closely at optimizing their crypto holdings using all possible avenues, including exploring crypto tax-loss harvesting strategies to reduce their tax liability.

While employing tax-loss harvesting, you should be aware of the wash sale rule actively enforced by the U.S. Internal Revenue Service (IRS) and other tax authorities. Wash sale rule exists to prohibit people from exploiting tax-loss harvesting benefits. Violations of the rule have cost significant losses for countless investors. The potential implementation of a crypto wash sale rule now hangs over cryptocurrency investments like the Sword of Damocles. In this article, we cover this important rule and show you how to avoid breaking it.

IRS Wash Sale Rule in the US

The IRS wash sale rule in the U.S. details a specific time period and action when it is against the law to make use of crypto tax-loss harvesting to offset capital gains with capital losses.