Some people will tell you that cryptocurrencies are taxed the same way as stocks. They are wrong. The IRS classifies crypto as “property”, rather than securities. In the eyes of the IRS, crypto is more like gold. It is an asset that you can keep and hope it will increase in value. This means that the famous wash-sale rule does not apply to crypto.

The wash-sale rule prevents a taxpayer from deducting a loss if they sell a security at a loss and then turn around and buy the same security within 30 days.

However, crypto is still subject to long-term and short-term capital losses rules. You can offset your capital losses only with capital gains. In addition, the IRS allows deducting $3,000 of capital losses on our personal tax returns. The rest gets carried over to future years.

Just like with other properties and stocks, the most favorable tax treatment for crypto is long-term (this means you held your crypto for longer than a year). If you sell your crypto in less than a year, you will pay the same tax rate you on your gain as what you pay for your W-2 wages. 

Now back to the wash-sale rule.

As we all know, crypto prices are volatile. And this volatility gives a couple of opportunities:

1. Make money when prices go up. This is self-explanatory. 

2. Harvest losses when prices go down. This may need explanation.

Example:

· Jim buys 50K of Ethereum.

· 60 days later, Jim sells Ethereum for 35K and gets 15K of capital losses.

· 62 days later Jim buys the same amount of Ethereum for 35K. 

· Later on Jim’s Ethereum goes up to $100K. Jim is very happy. He celebrates at a local bar. 

So, what happened here?

Jim harvested $15K in capital losses. He didn’t lose any Ethereum. Actually, he banked on it.

As I mentioned earlier, crypto is still subject to long-term/short-term gain rules. If Jim had no other capital gains, he could now deduct 3K on his current tax return and carry over the other 12K of losses to future years. If he had some other capital gains this year, these $15K in losses would offset his capital gains, and he did not owe any tax on his capital gains in that year.

Please note:

Losses from crypto-related securities, such as Coinbase (COIN), or Robinhood (HOOD) might be subject to the wash-sale rule. These are securities for federal tax purposes. Only cryptocurrencies itself are not classified as securities.

Advice:  If you plan to harvest losses, make sure you buy crypto itself and not the crypto holding securities.