Like most CPA's (NOT), I found myself wondering this morning, over coffee, if the sale of Cryptocurrencies are subject to the wash sale rules. There can be great implications to the wash sale rules.
What is a Wash Sale?According to the Internal Revenue Code section 1091:
Section 1091(a) provides that in the case of any loss claimed to have been sustained from any sale or other disposition of shares of stock or securities where it appears that, within a period beginning 30 days before the date of such sale or disposition and ending 30 days after such date, the taxpayer has acquired (by purchase or by an exchange on which the entire amount of gain or loss was recognized by law), or has entered into a contract or option so to acquire, substantially identical stock or securities, then no deduction shall be allowed under § 165 unless the taxpayer is a dealer in stock or securities and the loss is sustained in a transaction made in the ordinary course of such business.So selling stock or securities for a loss can be deemed a wash sale and disallowed if they are repurchased shortly (within 30 days before or after the sale) before or after the sale. Note that wash sale rules apply to stocks and securities. Cryptocurrencies are considered property and not stocks, or securities, and in fact not currency either. As such it is believed they are not subject to the wash sale rules. However, note that not everyone is sure that this is true. Some note that the IRS has not specifically stated cryptocurrencies are not subject to the rule. However, they are considered property and not securities which are subject to the wash sale rules. All of this is subject to change at any time.
Note too that there can be different rules for traders and dealers of cryptocurrencies versus those who are investors. I know, many too are wondering what they are considered if they simply use cryptocurrencies to buy and sell products and services, or use cryptocurrencies like actual currency. I know it is not clear. For now cryptocurrencies are not currency even if you use them just like currency.
For purposes of this post I am concerned about those who are investors or those who just use cryptocurrencies to buy, sell, or trade.
ImplicationsIn my previous post, I considered how people who use cryptocurrencies have an obligation to track their activity with them and report the activity on their tax return. Now it occurs to me that someone who sold or used cryptocurrencies early in 2018 for a gain could now possibly use or sell their crytocurrencies at a loss to offset those earlier gains and reduce their taxes. This assumes that they have cryptocurrencies that are now trading at loss compared to when they acquired them and this allows for a significant tax planning opportunity at the end of the year.
Since cryptocurrencies are considered property, for now, any losses can be used to offset gains and also up to $3,000 a year in net losses. Any net losses in excess of $3,000 can be carried forward to future years. So if you are "in" cryptocurrencies you should be having a discussion with your "tax guy" to take advantage of current opportunities and make sure you aren't surprised by the tax consequences of your activities with your cryptocurrencies.
For more information check out my previous post on cryptocurrencies:
Cryptocurrency and U.S. Income Taxes
CautionBelow you will see disclaimers about my posts and I mention being careful with information written with certain situations in mind. That is certainly the case with this post and others on cryptocurrency. I noticed some articles look at the rules and regulations for traders and dealers, others focus on the political aspects of the subject. I was surprised to find an article in favor of the wash rules for cryptocurrency to protect smaller investors. This article is great because it addresses what could be hidden dangers for those of you with cryptocurrencies aside from the political aspects of this issue. Here is a link to that article:
Opinion: The wash rule should be applied to Crypto - Crytocurrency Facts
So, if you have cryptocurrencies make sure you understand the tax implications of your activity in this market. I would be happy to help you out and be your "tax guy". Simply use my contact information below to send me an email to setup a time for a phone conversation.
The CPA Superhero
Cryptocurrency and U.S. Income Taxes
The Wash Sale Rule and Cryptocurrency - IRS Medic
Hope for Active Crypto Traders With Massive Losses - Forbes
Be careful when reading about tax law and its application, including my articles, because the wording and definitions are such a challenge and are influenced by writers perspective, specifically his own clients situations that he is mindful of and other situations the writer is not thinking of. The point is talk to your CPA about your situation and circumstances and don't rely on or make conclusions based on articles you read, including articles form irs.gov, because concepts and definitions are not very clear, and of course, they are subject to change. Now is the time to be having discussions about your situation and developing strategies for you and your business. Again, contact me using my information above to discuss your situation. I help business owners all over the U.S. and in foreign countries with their tax returns.