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Home CRYPTO

What is the Wash-Sale Rule, and does it apply to Crypto?

BlockNews Team by BlockNews Team
May 9, 2023
in CRYPTO, FINANCE, GUIDES, INVESTING
Reading Time: 3 mins read
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By purchasing a “substantially identical” asset within 30 days after the sale of a security, investors are not entitled to claim a tax loss on the sale of that security under the wash-sale rule.

  • The wash-sale rule, a tax regulation that forbids investors from deducting a tax loss from their taxes, was created by the Internal Revenue Service (IRS) in the US.
  • All types of securities, including stocks, bonds, mutual funds, and options, are covered by this rule.

Introduction

People must consider the tax consequences of their investments and any potential gains. One tax law that investors need to be aware of is the wash-sale rule. Under a decree issued by the Internal Revenue Service (IRS) in the United States, investors are not permitted to deduct a tax loss from the sale of a security if they buy a “substantially identical” asset within 30 days of the sale.

What is the Wash-Sale Rule?

According to the wash-sale rule, investors are not permitted to claim a tax loss on the sale of a security if they purchase a “substantially identical” asset within 30 days. The IRS created this regulation to stop investors from using the same portfolio structure while claiming tax deductions for losses. It covers a range of securities, including stocks, bonds, mutual funds, and options.

Understanding Cost Basis

Understanding the cost basis is necessary to comprehend the wash-sale rule’s impact completely. The cost basis, used to determine any taxable gain or loss, refers to the asset’s initial value when a stock or cryptocurrency is sold or disposed of. An asset’s cost basis is typically its purchase price plus any additional fees or commissions. The cost basis of an investment may be adjusted in some situations, such as when it is given as a gift or inherited, to represent the asset’s fair market value at the time of purchase.

Capital Gains and Losses

The cost basis calculates a capital gain or loss when an asset is sold. When investors sell an asset for more than they paid for it, they are subject to capital gains taxes. The investor still experiences a capital loss if the sale price is lower than the cost basis. The investor will thus pay the least amount of taxes possible.

Understanding “Substantially Identical”

Securities that are “substantially identical” to the protection provided are referred to as such. The wash-sale rule may be applicable, disallowing the tax loss on the sale, if an investor sells shares of a specific company at a loss and afterward buys shares of an identical business or a comparable company in the same industry within 30 days. The IRS has extensive authority to determine what qualifies as substantially similar security, although this conclusion can be challenging.

Application to Cryptocurrencies

Despite being well-established for traditional securities, the wash-sale rule’s application to cryptocurrencies is still up in the air due to inadequate legislation. The IRS hasn’t given any specific instructions on this issue. But most people agree that the wash-sale rule applies to cryptocurrencies and other capital gains-taxable assets. Therefore, the IRS considers it a “wash sale” and disallows the loss while adjusting the cost basis of the new security if an investor sells a cryptocurrency at a loss and repurchases it within a 30-day window.

Avoiding Wash-Sale Rule Violations

Investors can use many tactics to minimize wash-sale rule infractions and enhance tax benefits:

Waiting Period: Investors can hold off on buying a substantially identical security or cryptocurrency for at least 31 days. This prevents the tax loss from being disallowed and guarantees adherence to the wash-sale requirement.

Investing in Crypto Mutual Funds: Investors may want to consider investing in cryptocurrency mutual funds after suffering a loss from the sale of a cryptocurrency.

Disclaimer: BlockNews provides independent reporting on crypto, blockchain, and digital finance. All content is for informational purposes only and does not constitute financial advice. Readers should do their own research before making investment decisions. Some articles may use AI tools to assist in drafting, but every piece is reviewed and edited by our editorial team of experienced crypto writers and analysts before publication.
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