Some Congressional lawmakers are pushing to eliminate a lucrative tax loophole for cryptocurrency investors estimated to be worth billions annually. Currently, investors in digital assets like Bitcoin and Ether are not subject to the so-called Wash Sale Rules that investors in other securities are.
This provides an unfair tax advantage to Crypto Investors that has been widely used. To explain the Wash Sale Rules, please see the following example..
Let’s say that you purchase 10K shares of Stock A at $50 per share for $500K. 60 days later the stock drops to $30 per share.
This gives you an unrealized loss of $200K. You’d like to take advantage of the loss to reduce your overall income tax liability.
But you believe the stock will ultimately rise to $80 per share next year, so what do you do?
You could sell the stock, at $30 per share and then immediately repurchase the same number of shares at $30. This could potentially lock in a Capital Loss that you can carry forward without degrading your overall position in the investment.
But doing this would make you violate the Wash Sale Rules and negate your ability to deduct the loss.
The Wash Sale Rules state that if you sell an equity and then repurchase the same equity within 30 days, the loss is non-deductible. Currently crypto investors are not subject to these rules.
In practice, that means crypto investors can essentially claim the tax break associated with an investment loss without divesting the holding from their portfolio.
Doing this properly is known as tax-loss harvesting, a common strategy financial planners use with their clients. However, this requires waiting at least thirty days before repurchasing the security so that the loss can be harvested.
Rep. Jodey Arrington (R-TX) introduced a bill named the Applying Existing Tax Anti-Abuse Rules to Digital Assets Act that would eliminate the loophole by subjecting crypto transactions to Wash Sale Rules.
It’s unlikely that the wash sale bill will pass in the coming months as Congress approaches the midterm elections. The tax efforts come as the Senate debates a separate and broad crypto regulation measure, the Clarity Act, that would ban federal officials from issuing digital assets.
Wash sale rules have been on the books in some form since 1921.
Let me leave you with this…
How is this possible? Why don’t the same rules apply?
Crypto doesn’t fall within the purview of existing Wash Sale Rules because the federal government generally treats crypto as property, rather than a security. Lawmakers created the rules when digital assets were nearly a century away from being part of the financial mainstream.
As such, the rules as written do not neatly capture crypto.
Extending wash sale rules to crypto would also be a “budget-raiser” for lawmakers given the increase in taxes that it would create. As such it may be a hard sell before the midterms.
Additionally, the legislative push comes as many investors who bought crypto over the past one to two years are likely sitting on investment losses, and are therefore more likely to benefit from the wash sale exemption, experts said.
Bitcoin the largest cryptocurrency, has lost about half its value since October 2025.
Since the existing Wash Sale Rules apply to securities, investors who hold funds like bitcoin exchange-traded funds and other crypto ETFs which are securities, likely do need to comply. Holding crypto directly rather that in an investment fund, is what generally qualifies it as property.
I’m writing this to tell crypto investors to be cautious. If you sell your position and repurchase it within 30 days, the loss may not be deductible.
Sooner or later they’re going to level the playing field where you will be forced to work under the same rules as the rest of the investment world. Being able to deduct that loss may not be automatic on your 2026 tax returns.
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