Bybit Learn
Bybit Learn
1 août 2022

What Is the Crypto Wash Sale Rule?

The cryptocurrency market has always been characterized by wild up-and-down swings. However, the current market decline that started in November 2021 is the most profound crypto bear market ever as measured by the total value lost — $1.8 trillion, and counting.

Gone are the days when you could simply sit back and rely on your Bitcoin investment to grow over time. In this environment, investors need to look closely at optimizing their crypto holdings using all possible avenues, including exploring crypto tax-loss harvesting strategies to reduce their tax liability.

While employing tax-loss harvesting, you should be aware of the wash sale rule actively enforced by the U.S. Internal Revenue Service (IRS) and other tax authorities. Wash sale rule exists to prohibit people from exploiting tax-loss harvesting benefits. Violations of the rule have cost significant losses for countless investors. The potential implementation of a crypto wash sale rule now hangs over cryptocurrency investments like the Sword of Damocles. In this article, we cover this important rule and show you how to avoid breaking it.

IRS Wash Sale Rule in the US

The IRS wash sale rule in the U.S. details a specific time period and action when it is against the law to make use of crypto tax-loss harvesting to offset capital gains with capital losses.

The U.S. wash sale rule applies when an asset that is substantially identical to the first one has been sold at a loss before being bought back within 30 days. If an investor purchases a substantially identical stock or bond within 30 days, they are unable to benefit from balancing out their capital gains with their capital loss.

The time window to observe around your loss-making sale

Let’s say you sold 100 shares of Microsoft at a loss of $20 per share, i.e., a capital loss of $2,000 in total, on May 15, 2022. According to the wash sale rule, you wouldn’t be able to claim that $2,000 tax deduction if you also purchased at least 100 shares of Microsoft anywhere between April 15, 2022 and June 15, 2022.

If you happened to purchase a lower amount of Microsoft — for instance, 70 shares — during that time window, you can only claim a tax loss for 30 shares ($600), the difference between your loss-making sale (of 100 shares) and the associated purchase (of 70 shares) within 30 days before or after it.

Could a Crypto Wash Sale Rule Happen in the US?

Keep in mind, however, that the IRS wash sale rule currently only applies to securities, which include bonds, stocks and similar financial instruments. Cryptocurrencies aren’t classified as securities by the IRS, which means that this rule doesn’t apply to crypto.

However, the U.S. government has intensified its efforts to implement a crypto wash sale rule. In late 2021, the Biden administration proposed a legislative bill called the Build Better Act. One of the many provisions proposed in the bill would have subjected cryptocurrency to the wash sale rule. Despite passing the House of Representatives, the bill was defeated in the Senate.

However, the government continues its efforts to negotiate a required Senate majority to pass at least some parts of the bill. This opens up the possibility of the wash sale rule’s implementation on crypto, effectively at any time.

How to Avoid Wash Sale Rule Violations

There are three main ways to ensure that you do not violate a future crypto wash sale rule, while also successfully claiming your tax losses.

1. Simply observe the 30-day before-and-after time window

This is the first and simplest rule. The IRS wash sale rule doesn’t include a draconian period of coverage. Observing the modest 30-day time frame before and after the sale is the safest way to ensure that your tax loss claim is successful. Pre-plan your course of action, and buy your target asset 31–40 days before or after the loss-making sale.

Naturally, using this method does expose you to some market volatility. However, the price changes of your target asset might go in your favor, not necessarily against you, particularly with some basic planning and market analysis.

For example, if your target asset is on a longer-term downtrend, make your purchase 31+ days after your loss-making sale. Conversely, if the asset is trending up, and is widely expected to continue along this pattern, purchase it 31+ days before the loss-making sale.

Finally, if the asset’s price is stable— and not in a significant uptrend or downtrend — then you’re likely not to lose (or win) much by observing the 30-day time window.

2. Sell your asset and buy a fund-based product with significant exposure to it

The IRS wash sale rule specifies that tax losses cannot be claimed when the product bought and sold is the same or is substantially identical. Unfortunately, there is no clear-cut, number-based specification for what a substantially identical product is. Investors largely rely on the historical application of the rule by the IRS to assess if their tax loss claims are safe.

In general, the IRS has been happy with investors selling a stock and buying a composite fund-based product with significant exposure to that stock. Thus, you could buy a mutual fund, index fund or ETF product with a large proportion allocated to your asset.

Although a crypto wash sale rule has yet to be applied, it is useful to consider fund-based crypto products while planning for the rule’s likely introduction. For example, products such as Bitwise 10 Crypto Index Fund and Galaxy Crypto Index Fund have significant shares allocated to Bitcoin in their composite indices. These products might be considered if your loss-making sale involves BTC.

3. Sell your asset and buy another one with a very high correlation to it

Two assets that traditionally share a high correlation may also be used to stay clear of any future crypto wash sale rule violation. High levels of correlation between two assets indicate that their prices move in the same direction and at around similar magnitudes of change in the market. Correlations are expressed using the correlation coefficient, a value in the range between −1.0 and 1.0.

Normally, a correlation coefficient of 0.9 to 1.0 is indicative of a very strong association between the two assets’ prices. When selling an asset at a loss, you could pre- or post-purchase another asset or product that shares a correlation of 0.9 (or above) along with it.

Correlation between BTC and ETH over 1 year from July 2021 to 2022

Source: CoinMetrics

Crypto Wash Sale Rules in Other Countries


In Canada, the Canada Revenue Agency has implemented a superficial loss rule to make sure that wash sales don't occur regularly. This rule states that investors can't claim capital losses if they sell and buy back an asset in a 30-day window.


In the U.K., the HM Revenue & Customs (HMRC) has created specific requirements that are used to calculate the cost basis, which is similar to the wash sale rule in the U.S. In the U.K., a cost basis technique known as share pooling is the main one used for crypto tax-loss harvesting.

With this method, similar assets are pooled together to form an average cost basis, which results in having a pool for crypto coins like BTC, ETH and so on. The average cost basis for every pool is then calculated to identify the final gains and losses from your crypto investments. Yet, this cost basis technique makes it easier to exploit false losses through crypto wash trading.

The HMRC has created two rules that are designed to prevent the artificial losses from occurring. These rules are known as the Bed and Breakfast Rule, and the Same Day Rule.

With the Bed and Breakfast Rule, you can't benefit from capital losses if you purchase the same cryptocurrency within 30 days after selling your previous holdings. The Same Day Rule is similar, but involves a sale and purchase of the same crypto within 24 hours. Unlike the U.S. wash sale rules, these guidelines apply to cryptocurrencies alongside other types of assets.


The Australia wash sale rule states that you can't offload an asset for a loss and follow this up by purchasing the same asset to gain tax benefits. There is no specific period of time associated with this rule. In most cases, the intent of the investor determines if they will be able to realize capital losses.

The Takeaway

The very likely future introduction of a crypto wash sale rule makes it imperative for investors to keep abreast of the latest developments in this area. This applies to crypto investors both in the U.S. and in many other jurisdictions, as governments around the globe are applying ever-increasing regulatory pressure on crypto.

If, or rather when, your national government introduces a wash sale rule on crypto, you could use one of the three basic methods outlined above to safely lower your tax bill.