There’s a legal loophole in crypto tax that the IRS didn’t put there on purpose. It’s just a gap — a gap between rules written for Wall Street in 1954 and an asset class that didn’t exist until 2009. IRC §1091, the wash sale rule, applies to “stocks or securities.” Digital assets, as of this writing, are not formally classified as securities under that section. So for tax years through at least 2025, you can sell crypto at a loss, buy it back five minutes later, and still claim the loss.
Enjoy it. It may not last.
The Current Law and Why It Matters
IRC §1091 disallows a loss on the sale of a “stock or security” if you buy a “substantially identical” stock or security within 30 days before or after the sale. That 30-day window on either side is what most traders know as the wash sale rule.
The IRS and Treasury have not issued formal guidance treating digital assets as “stocks or securities” under §1091. The IRS has said crypto is property — see Notice 2014-21. Property is not the same as a security under this section. Until Congress or Treasury formally extends the rule to digital assets, wash sales don’t apply to crypto losses.
What that means in practice: if Bitcoin drops and you want to realize the loss for tax purposes, you can sell, immediately repurchase, and the loss is still deductible. Your economic position is restored within minutes, your tax loss is locked in, and the IRS currently has no mechanism to deny it under §1091.
For equity traders, this is impossible. Sell Apple at a loss, buy Apple back within 30 days — loss disallowed. The cost basis of the disallowed loss rolls into the replacement shares, and the holding period carries over. Crypto doesn’t work that way. Not yet.
Proposed Changes: The Window Is Closing
This isn’t a secret. Congress has been trying to close the crypto wash sale gap for years.
The Build Back Better Act, passed by the House in November 2021 but stalled in the Senate, contained an explicit extension of §1091 to digital assets with a proposed effective date of January 1, 2022. It didn’t pass.
Since then, multiple reconciliation proposals and budget frameworks from 2023 through 2025 have included similar provisions. The current political consensus — across both parties, notably — is that extending wash sale rules to crypto is a revenue-raiser, which means it has bipartisan appeal whenever Congress needs to pay for something else.
The proposed mechanics are consistent across drafts: extend §1091 to “digital assets” as defined under the broker reporting rules added by the Infrastructure Investment and Jobs Act (2021). Proposed effective dates in recent drafts range from the date of enactment to January 1, 2026 or January 1, 2027.
As of this filing season, wash sales still do not apply to crypto for tax year 2025 returns. But given the legislative trajectory, treating 2025 as the last clean year to harvest freely is not an unreasonable posture.
The Practical Playbook: Harvesting Losses on Crypto Today
If you have unrealized losses in crypto positions and haven’t yet filed or closed out 2025, here’s the basic framework:
Step 1 — Identify harvestable losses. Pull your current positions and cost basis across all wallets and exchanges. You’re looking for positions where fair market value is below your basis. Across a multi-chain portfolio this is non-trivial — but that’s what cost basis tracking is for.
Step 2 — Sell to realize the loss. The loss is not locked in until you have a completed sale. Mark-to-market doesn’t apply here (unless you’re a commodities trader under §475, which is a different conversation). You need an actual transaction.
Step 3 — Repurchase if desired. Because wash sales don’t currently apply, you can immediately repurchase the same token. Your economic exposure is restored; your tax loss is realized. Straightforward.
Step 4 — Net against gains. Capital losses offset capital gains dollar-for-dollar. Net short-term losses offset short-term gains first; net long-term losses offset long-term gains first. Excess losses can offset up to $3,000 of ordinary income per year, with the remainder carrying forward indefinitely.
Worked Example
You hold 5 ETH purchased at $3,200 per coin (total basis: $16,000). Current market price is $2,100 per coin (current value: $10,500). Unrealized loss: $5,500.
You sell all 5 ETH on December 15, 2025. Realized loss: $5,500. You immediately rebuy 5 ETH at $2,100.
Your new basis in the replacement ETH is $10,500. Your realized loss of $5,500 goes on Schedule D. Under current law, §1091 does not apply — the loss stands.
If you also have $4,000 in short-term capital gains from other crypto trades in 2025, the $5,500 loss offsets all $4,000, leaving a $1,500 net loss. That $1,500 offsets $1,500 of ordinary income. Any remaining carryforward goes into 2026.
Documenting the Harvest: Stay Defensible
Retroactive application of a new wash sale rule to completed 2025 transactions is unlikely — tax law changes are almost always prospective, and applying new rules retroactively to closed transactions raises serious constitutional concerns. But “unlikely” isn’t “impossible,” and documentation is always cheap relative to audit defense.
Keep the following for any harvesting transaction:
- Exchange or DEX confirmation of the sale with timestamp, price, and quantity
- On-chain transaction hash for the sale (and the repurchase, if on-chain)
- Cost basis documentation showing your original acquisition — date, price, source
- A brief contemporaneous note (even a saved email to yourself) stating the purpose: “sold to realize tax loss, repurchased same day”
If §1091 is eventually extended retroactively (again, unlikely), you want a clean paper trail showing exactly what happened, when, and why. You also want to be able to demonstrate that the repurchase happened after the sale, not as a pre-arranged wash.
The Equity Complication: Watch Your Replacement Securities
Here’s a wrinkle worth knowing if you hold both crypto and equities.
The wash sale rule applies to stocks and securities today. If you sell a crypto token at a loss and purchase a security that is “substantially identical” to that crypto position within the 30-day window, you may have a problem.
The practical scenario: you sell your Coinbase (COIN) stock at a loss. Within 30 days you buy more COIN. That’s a wash sale — COIN is a security. The loss is disallowed.
The murkier scenario: you sell Bitcoin at a loss and buy a Bitcoin ETF within 30 days, or vice versa. The IRS hasn’t formally ruled on whether a spot Bitcoin ETF and Bitcoin itself are “substantially identical” for §1091 purposes. Most practitioners take the view they are not — one is a security, one is property — but that’s a gray area, not a bright line. Mixing crypto loss harvesting with ETF repurchases in the same 30-day window deserves careful attention, and probably a conversation with your preparer before you execute.
The safer approach: keep the crypto harvest and the equity trades on separate timelines until there’s formal guidance.
What to Do Before You File
If you traded crypto in 2025, tax-loss harvesting is still a legal and viable strategy. The wash sale gap is real, it’s current law, and using it is not aggressive — it’s accurate application of the rules as written.
What’s not a good idea: assuming it will still be available in 2026 and beyond. Legislative momentum on this is real. The most likely effective date for any new rule is the date of enactment or January 1 of the following year, but Congress has occasionally moved faster when motivated by a revenue need.
If you have unresolved 2025 losses, multi-chain positions you haven’t fully reconciled, or you’re unsure whether your current cost basis is accurate enough to support a defensible harvest — this is worth sorting out before you file, not after.
This post covers general principles, not tax advice for your specific situation. Your basis methodology, holding periods, and overall tax picture all affect the outcome. Consult your CPA or reach out to us before filing if you’re running a deliberate harvest strategy.
Need help with your crypto taxes? Mike Ring and the BCTP team handle the messy stuff — multi-chain DeFi, 1099-DAs that don’t add up, prior-year amendments. Free consult at cryptotaxprep.io or call 410-320-7348.
This isn’t tax advice. Talk to a professional about your specific situation.
