Under current federal law, the wash sale rule does not apply to cryptocurrency. Internal Revenue Code Section 1091 disallows losses only on sales of “stock or securities,” and the IRS treats digital assets as property. That leaves crypto investors free to sell a token at a loss, buy it back the same day, and still claim the capital loss on their tax return, a move that would be blocked for stocks or mutual funds.
Why Crypto Falls Outside Section 1091
The wash sale rule exists to stop investors from generating paper losses without actually giving up an investment. Under Section 1091, if you sell stock at a loss and buy the same or a substantially identical stock within 30 days before or after the sale, the IRS disallows the loss deduction.1Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities The disallowed loss is added to the cost basis of the replacement shares instead of vanishing outright, but the immediate deduction is gone.
Crypto sits outside that language because of how the IRS classifies it. Notice 2014-21 established that virtual currency is treated as property for federal tax purposes, with general property tax principles governing every transaction.2Internal Revenue Service. Notice 2014-21 Section 1091 covers “stock or securities.” Crypto is property. The statute’s plain language leaves digital assets untouched, so a sale and same-day repurchase of Bitcoin or Ethereum does not trigger the disallowance.
What This Means for Harvesting Crypto Losses
Because the wash sale rule doesn’t reach digital assets, crypto tax-loss harvesting is more flexible than the stock version. You can sell a token that has dropped in value, lock in the capital loss, and repurchase immediately. There is no mandatory 31-day waiting period and no “substantially identical” analysis to work around.
The practical benefit is straightforward. If you bought Ethereum at $3,500 and it dropped to $2,000, selling triggers a $1,500 capital loss you can use to offset gains elsewhere in your portfolio. Buying back right away keeps your position in place while still generating the deduction. Your new cost basis resets to the repurchase price, which matters when you eventually sell for good.
One caution belongs alongside the strategy. The IRS has other tools besides Section 1091. The economic substance doctrine allows the agency to disallow transactions that lack any genuine business purpose beyond generating a tax benefit. Selling and rebuying within seconds purely to manufacture a loss, especially in large, repetitive patterns, could draw scrutiny. Records showing legitimate investment rationale and some meaningful gap between trades make the strategy far more defensible.
Is Congress About to Close the Gap
Congress has shown interest in extending the wash sale rule to digital assets. Multiple legislative proposals have included that language, but none have passed as of mid-2026. The direction of travel is clear enough that anyone building a strategy around crypto loss harvesting should track new tax legislation each year, because a change would apply prospectively to future tax years rather than what you have already reported.
How to Report the Loss
Every sale, exchange, or disposal of crypto that produces a gain or loss is reported on Form 8949. For each transaction you need the date acquired, the date sold or exchanged, the gross proceeds, and your cost basis.3Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets Cost basis is the original purchase price plus transaction costs such as exchange or network fees. Buy one Bitcoin for $40,000 with a $200 fee and your basis is $40,200.
Form 8949 separates transactions into short-term (held one year or less) and long-term (held more than one year). Totals flow to Schedule D of Form 1040, which calculates your net capital gain or loss for the year.4Internal Revenue Service. 2025 Instructions for Schedule D (Form 1040) Most e-filing software moves the numbers automatically; a paper filing needs both forms attached.
Deduction Cap and Loss Carryforward
If your total capital losses exceed your total capital gains for the year, you can deduct the excess against ordinary income, but only up to $3,000 per year, or $1,500 if married filing separately.5Internal Revenue Service. Topic No. 409, Capital Gains and Losses Anything beyond that carries forward indefinitely. The Capital Loss Carryover Worksheet in the Schedule D instructions calculates how much rolls into the next year.
A rough year of crypto losses can therefore generate benefits spread across many future returns. Realize $50,000 in net losses with no other capital gains and you deduct $3,000 this year, carrying $47,000 forward. Those carryforward losses stay available to offset future gains, or ordinary income up to the annual cap, until they are used up.
Watch the Holding Period When You Harvest
Short-term and long-term losses aren’t interchangeable on the way through Schedule D. Short-term losses offset short-term gains first, and long-term losses offset long-term gains first, before any cross-netting happens. That matters for which gains a harvested loss actually erases.
The stakes are real because the rates differ sharply. Short-term capital gains are taxed at your ordinary income rate, which can run as high as 37%. Long-term capital gains get preferential rates of 0%, 15%, or 20%. For a single filer in 2026, the 0% rate applies to taxable income up to $49,450, the 15% rate covers income from $49,451 to $545,500, and the 20% rate applies above that. A $50,000 gain after 11 months could cost $18,500 at the 37% ordinary rate; hold one more month and the same gain might cost $7,500 at the 15% long-term rate. When you decide which losing position to sell and when, the holding period on both the loss and the gain it is meant to offset should shape the timing.
The Bottom Line for Now
Selling crypto at a loss and repurchasing immediately is a legitimate tax move under the rules as they stand in 2026. The loss goes on Form 8949, flows through Schedule D, offsets gains dollar for dollar, and can shelter up to $3,000 of ordinary income each year with any excess carrying forward. Keep clean records, avoid patterns that look purely mechanical, and watch for legislation that would pull digital assets under Section 1091 in a future tax year.