Robert A. Bonavito, CPA PC

Crypto and Stock Wash Sale Rules

How to turn unrealized capital losses into realized capital losses without triggering the IRS wash sale rule.

The purpose of the wash sale rule was made law by Congress in the 1930s in order to stop taxpayers from selling stock at a loss and buying it back the same day. Congress wanted to ensure that investors who had stock losses had real economic losses and not pretend losses.

The Wash Sale Rule Only Applies to Securities Such as Stocks and Bonds

As year-end approaches many investors in the stock market are going to be selling stock at a loss due to the decline in the stock market. The main purpose of this is to offset prior gains and also recognize the $3,000 loss the Internal Revenue Service let you use to offset ordinary income. In prior years most investors were concerned with long-term gains versus short-term gains. That is not the concern this year of most investors. One potential pitfall is making sure you avoid the wash sale rule regarding recognizing losses.

The wash sale rule states that investors must wait 31 days before rebuying the same security. If you sell a security and want to recognize the loss, it had to be purchased more than 30 days ago and you cannot rebuy it until at least 31 days in the future.

Assuming You Want to Keep the Stock or Bond in Your Portfolio but Want to Utilize the Loss to Offset Gains

There are several planning tools you can use the harvest losses without triggering the wash sale rule.

You can sell a stock or bond and rebuy that same stock or bond after 30 days and still not lose the tax deduction.

You can double your position in the investment and sell half the position after 31 days. By doing this you will be able to stay in the investment during the 31 day waiting period.

You can sell a stock or bond and buy a similar investment. For example, you could sell Amazon and buy an ETF that holds a major position in Amazon on the same day.

You could sell Ford and buy GM.

You can sell a stock and by the call option, and the next day buy the stock and sell a call option. In this way you will be able to recognize the loss.

Remember, that brokers report wash sales to the IRS based on CUSIP numbers that uniquely identify stocks and bonds. However, if a stock is bought or sold in a separate brokerage account this will not trigger the wash sale notification. This is important to realize if you are buying and selling call options or shorting stock in order to recognize legitimate losses.

Crypto Currency

Crypto currency is not a stock or bond, it is considered property. As property Common Law applies to the sale of crypto currency, thankfully the laws are essentially identical to the wash sale rules.

Yes, you can offset crypto losses against other investment losses in stocks and bonds and vice versa.

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