We understand that a tax season can be stressful, especially when your crypto portfolio is down. You might be wondering if there’s a legal way to use your losses to pay less in taxes. That’s where the crypto wash sales come in. Many investors have used this method to claim losses while still holding the same coins. But is it really allowed?
The IRS hasn’t applied the wash sale rule to crypto yet, which means there’s a window of opportunity in 2025. But that could change soon. In this guide, we’ll explain how crypto wash sales work, whether they’re legal, and how you can use them the smart way to lower your tax bill without running into trouble.
What Is the Wash Sale Rule?
The wash sale rule is a tax rule that applies when you sell an asset at a loss and buy it back too soon. If you sell a stock, bond, or similar security for less than you paid and then repurchase it within 30 days, the IRS won’t let you claim the loss on your taxes. This 30-day window includes both the time before and after the sale.
The idea is simple: if you plan to buy back the same asset quickly, your loss isn’t real in the eyes of the IRS. You’re just selling and rebuying to lower your tax bill without making any real change to your investment. That’s what the wash sale rule is meant to prevent. For now, this rule only applies to stocks and securities, not crypto, but that could change in the near future.
Everyday Purchases with Cryptocurrency
For daily expenses, various new alternatives bridge the gap between cryptocurrency holdings and regular merchants. Gift card marketplaces such as Bitrefill and Gyft convert cryptocurrencies into digital gift cards for big stores such as Amazon, Walmart, and hundreds more. This method effectively allows anyone to use cryptocurrency anywhere these gift cards are accepted.
Another real-world use case involves subscription services. A growing number of VPN providers, web hosting companies, and select streaming platforms are now embracing direct crypto payments. Content providers on sites such as Twitch are increasingly accepting bitcoin payments through Bitrefill or BitPay.
Digital currency has found its place in the world of charitable giving. Donation platforms like The Giving Block empower individuals to make crypto contributions to a wide array of organisations. These transactions frequently offer tax advantages across various nations, enhancing their appeal for donors.
Why Was the Wash Sale Rule Introduced?
The IRS introduced the wash sale rule to stop people from taking fake losses on purpose. In the past, some investors would sell stocks just before tax season to show a loss, then buy them back right after, without any real change in their investment. This trick helped them reduce their taxes unfairly.
To close that loophole, the wash sale rule was added. It makes sure that if you want to claim a loss, you must stay out of the same investment for at least 30 days. This way, investors can’t just sell and rebuy to lower their tax bills. The rule encourages honest reporting and fair tax treatment for everyone.
Read More: Crypto Taxes in America 2025: Tax Guide
Does the Wash Sale Rule Apply to Cryptocurrency in 2025?
As of 2025, the wash sale rule does not apply to cryptocurrencies. That’s because the IRS treats crypto as property, not as a security like stocks or bonds. Since the current law only applies to securities under Section 1091 of the U.S. tax code, crypto transactions are not affected, at least for now.
This means you can technically sell a cryptocurrency at a loss and buy it back the same day without losing the right to claim that loss on your taxes. Many investors have used this as a legal strategy to reduce their taxable gains. But lawmakers are keeping a close eye on this loophole. Several tax proposals have already tried to expand the wash sale rule to include crypto, and experts believe this change could happen soon.
So while the rule doesn’t apply yet, it’s smart to stay updated. A future change could limit or remove this tax-saving option altogether.
How Crypto Investors Use Wash Sales to Harvest Tax Losses?
Many crypto investors use wash sales as a way to reduce their tax bills legally. Here’s how it’s done:
Capital Loss Basics and Tax Benefits
When you sell crypto for less than what you paid, the difference is called a capital loss. You can use this loss to reduce your capital gains from other trades. If your total capital losses are more than your gains, you can also deduct up to $3,000 from your ordinary income each year. Any leftover loss can be carried forward to future years until it’s fully used.
This rule helps investors lower their taxes during market downturns. For example, if you made $10,000 in capital gains but also had $4,000 in crypto losses, you would only be taxed on $6,000. That’s why many people look for chances to harvest their crypto losses before the tax year ends.
The Tax-Loss Harvesting Strategy
Tax-loss harvesting is when you sell an investment at a loss to claim a deduction, then buy it back later to stay in the same position. In crypto, this has become a popular strategy since the wash sale rule doesn’t apply (yet). Investors take advantage of price dips to realise losses, then re-enter the market quickly, keeping their portfolio intact while locking in tax savings.
Since crypto is highly volatile, these short-term dips happen often. Smart traders use them to reduce their gains or income taxes. However, it’s important to track each transaction closely and keep records for the IRS.
Example Scenario: Using a Wash Sale for Tax Advantage
Let’s say Jenna bought 2 ETH for $4,000. A few months later, the value dropped to $3,000.
She decides to sell at a $1,000 loss. The very next day, she buys the same 2 ETH back for $3,100. Because the IRS doesn’t apply the wash sale rule to crypto, Jenna can still claim the $1,000 capital loss on her taxes.
This helps Jenna reduce her total taxable income, even though she still holds the same asset. As long as the law remains unchanged, strategies like this are legal and useful, but that could change if Congress closes the loophole in the future.
Read More: Crypto Tax Evasion in America
Will the Wash Sale Rule Be Applied to Crypto in the Future?
There’s a strong chance the crypto wash sale rule could be applied to crypto soon. Lawmakers have already proposed adding cryptocurrencies to the existing rule in multiple tax bills between 2021 and 2025. So far, none of those proposals have passed into law, but the interest from Congress and the IRS keeps growing.
The Biden administration’s 2025 budget plan also mentioned closing the crypto wash sale loophole. Treasury officials have made it clear they expect Congress to act. If that happens, the wash sale rule would stop investors from claiming losses if they buy the same crypto again within 30 days.
It’s important to note that no law so far has applied the rule retroactively. That means even if the law changes, your past trades won’t be affected. Still, the window may be closing. It’s smart to stay prepared and watch for updates that could limit or end this strategy.
What Is the Economic Substance Doctrine and Why Does It Matters?
Even if crypto wash sales are legal right now, the IRS may still reject them using the economic substance doctrine.
How the Doctrine Applies to Crypto Transactions?
The economic substance doctrine says that if a transaction has no real purpose other than reducing taxes, it can be disallowed, even if it follows the technical rules. In crypto, this means that selling and quickly rebuying the same asset just to claim a loss could be challenged by the IRS.
For example, if you sell a token at a loss and immediately buy it back with no market-driven reason or investment change, the IRS might argue there was no “real” reason behind the trade. In their eyes, it wasn’t a genuine transaction, it was just for a tax break. If flagged, you could lose the right to deduct that loss.
How to Stay on the Safe Side?
To avoid trouble, you need to show there’s economic purpose behind your trades. One way is to wait a few days before buying the same crypto again. Even though the law says 30 days for stocks, waiting just a few days may be enough for crypto, especially in a volatile market.
Another approach is to only rebuy if your move was based on actual market signals or investment needs. If you can show a valid reason beyond tax savings, the IRS is less likely to challenge the loss. Keeping detailed records of your trades and why you made them can help if you’re ever audited.
Read More: How to Report Crypto on Taxes in the USA?
Examples of Wash Sales: What You Should and Shouldn’t Do?
The best way to understand how wash sales work is by looking at real examples. Here’s one that works under current rules, and another that could land you in trouble later.
What You Should Do: A Smart Wash Sale Example
Let’s say Mike bought 10 SOL tokens for $1,000. Later in the year, the price drops to $600, and Mike decides to sell his tokens to lock in the $400 loss. He waits 7 days before buying SOL again at $620.
Because the wash sale rule doesn’t apply to crypto yet, and he didn’t rebuy immediately, this trade is:
- Legal under IRS rules as of 2025
- Safer under the economic substance doctrine
- Helpful for reducing his tax bill
Mike still holds the same token, but his tax record now reflects the $400 loss, which can offset his gains or reduce income up to $3,000.
What You Shouldn’t Do: A Risky Wash Sale Example
Sarah bought $5,000 worth of ADA. When the value dropped to $3,500, she sold it to claim a loss, and rebought the same ADA just two hours later at $3,600.
Here’s what went wrong:
- She repurchased too quickly, showing no market-based reason for the sale
- The IRS might question this move under the economic substance doctrine
- If the wash sale rule changes mid-year, this could become disallowed retroactively
Even though it’s technically allowed today, this kind of rapid buyback puts Sarah at risk of losing her deduction, and facing penalties later.
How to Safely Harvest Crypto Losses Without Triggering Future Penalties?
If you want to lower your tax bill without breaking any rules, there are smart ways to harvest crypto losses without taking risks.
Wait for 30 Days Before Rebuying
The safest option is to sell your crypto at a loss and wait at least 30 days before buying it back. Even though the wash sale rule doesn’t apply to crypto yet, this waiting period protects you from future rule changes and the economic substance doctrine.
Waiting 30 days shows that your transaction had real intent, not just tax savings. It also ensures that if Congress passes new wash sale rules mid-year, your trade is less likely to be flagged. Yes, you might miss some price movement during that time, but you stay fully compliant and avoid problems during an audit.
Swap with Correlated Assets
Another option is to sell the asset at a loss and buy a closely related token instead. For example, if you sell UNI (Uniswap) at a loss, you could buy DPI (DeFi Pulse Index), which is highly correlated with UNI’s price.
This allows you to stay in the market without holding the same asset. After 30 days, you can sell DPI and return to UNI if you like. This approach:
- Keeps you invested in a similar market sector
- Avoids the risk of a wash sale
- Gives your trade more substance if questioned by the IRS
Just make sure the asset you’re swapping into has a real market relationship with the one you sold.
Read More: IRS Crypto Audits
How KoinX Helps You Maximise Tax Savings from Crypto Transactions?
Managing crypto taxes across wallets, exchanges, DeFi platforms, and NFT trades can be a real headache. Most investors don’t have the time or tools to calculate everything accurately, especially with changing IRS rules. That’s where KoinX steps in as your all-in-one solution for crypto tax tracking and reporting.
Import Transactions from Over 300 Platforms
KoinX connects with more than 300 wallets, exchanges, and blockchains. Whether you’re trading on Binance, using MetaMask, or minting NFTs, you can sync all your activity in one place without manual uploads.
Auto-Categorisation of Transactions Based on Type
Once your data is imported, KoinX automatically categorises every transaction, whether it’s a swap, staking reward, airdrop, or NFT mint. This saves hours of work and ensures each activity is tagged correctly for tax reporting.
Accurate Tax Calculation as per IRS Rules
KoinX follows the latest IRS crypto tax guidelines and supports popular accounting methods like FIFO, LIFO, and HIFO. It calculates your short- and long-term gains, helping you report every number with confidence.
Safety and Security
Your data stays safe with bank-level encryption and industry-standard security protocols. KoinX doesn’t ask for private keys, and you’re always in control of your information.
Built for DeFi and NFTs
Unlike many tools that struggle with DeFi and NFTs, KoinX is designed to handle complex trades. It accurately tracks liquidity pool activity, NFT buys and sells, and smart contract interactions, so nothing is missed during tax filing.
Join thousands of US investors who trust KoinX to simplify their crypto taxes and stay compliant, no matter how complex your trades are. Sign-up on KoinX today!
Conclusion
Crypto wash sales offer a smart way to save on taxes in 2025, but only if you use them carefully. While the IRS still doesn’t apply the wash sale rule to crypto, that could change any time. So it’s important to plan your trades with caution and stay updated on new tax laws.
If you want to safely track losses, plan your next move, and prepare for rule changes, KoinX makes it easy. It helps you manage all your crypto transactions in one place, so you can focus on growing your portfolio, not worrying about tax mistakes. So why’s the wait? Join KoinX today!
Frequently Asked Questions
Can the IRS Disallow a Crypto Loss Without the Wash Sale Rule?
Yes. Even if the wash sale rule doesn’t apply, the IRS can reject a crypto loss using the economic substance doctrine if it sees no real investment reason behind the sale and repurchase beyond tax savings.
Does a Wash Sale Apply If I Use a Different Exchange to Rebuy?
Yes. It doesn’t matter which platform you use. If you sell and rebuy the same asset within a short period, regardless of the exchange, it could still be considered a wash sale if the rule gets extended to crypto.
Is There a Wash Sale Rule for Crypto Staking Rewards?
Not specifically. However, if you stake tokens and then sell and rebuy them quickly, future tax rules could apply wash sale treatment to that transaction. It’s best to track these carefully and consult a tax expert when needed.
Can I Be Audited for a Crypto Wash Sale?
Yes. If your crypto tax filing looks suspicious or if new rules apply, the IRS can audit your return. Keeping records and using compliant tax tools can help you stay prepared in case your return is reviewed.
How Can I Track the Holding Period of My Crypto Assets?
You can track holding periods using crypto tax tools like KoinX that show the date you bought and sold each asset. This helps you stay on top of wash sale windows and plan trades that avoid rule violations or IRS issues.
