Introduction
The intersection of cryptocurrency transactions and tax regulations—particularly the wash sales rule—has sparked significant debate among tax professionals and regulators. This article examines whether cryptocurrencies fall under the purview of Internal Revenue Code (IRC) Section 1091, which disallows losses from wash sales of "stock or securities."
Understanding the Wash Sales Rule
Statutory Language of IRC §1091
The wash sales rule under IRC §1091(a) disallows losses sustained from selling "stock or securities" if substantially identical assets are repurchased within 30 days before or after the sale. Key points:
- Applies only to "stock or securities" (undefined in the statute).
- Excludes dealers in stock/securities.
- Expanded in 1988 to include contracts or options for stock/securities.
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Cryptocurrency’s Exclusion from §1091
Cryptocurrencies lack explicit classification as "stock or securities" in:
- IRC definitions.
- Legislative history.
- IRS/Treasury regulations.
Example: The 2021 Build Back Better Act proposed extending wash sales to "digital assets," but this provision was omitted from the enacted Inflation Reduction Act of 2022.
Arguments For and Against Applying Wash Sales to Crypto
Case Against Inclusion
Statutory Interpretation:
- Gantner v. Comm’r (Tax Court 1994) affirmed that options were not "securities" under pre-1988 §1091, emphasizing strict adherence to statutory language.
- No legal basis exists to stretch "securities" to include crypto.
Regulatory Context:
- SEC’s classification of certain tokens as "securities" under securities law does not equate to tax-law definitions.
Case For Inclusion
- Policy Concerns: Critics argue excluding crypto enables "loss harvesting" (selling to claim losses while maintaining economic exposure).
- Biden Administration’s Stance: The 2024 budget proposal seeks to close this "loophole" (PDF p. 164).
Key Reasons Cryptocurrencies Are Not Subject to Wash Sales
Definitional Gap:
- "Securities" in tax law typically means debt instruments or corporate stock—not decentralized digital assets.
Transaction Legitimacy:
- Crypto losses are bona fide per Treas. Reg. §1.165-1(b): Executed on exchanges, recorded on blockchain.
Legislative Silence:
- Congress has repeatedly declined to amend §1091 to include crypto, despite proposals.
FAQs
1. Can the IRS disallow crypto losses under other rules?
- Only if transactions lack economic substance (e.g., sham trades). Normal market sales qualify for loss deductions.
2. Could future laws change this?
- Yes. Legislative proposals (e.g., Biden’s 2024 budget) suggest potential future amendments.
3. How does SEC’s "security" designation affect taxes?
- SEC rulings impact securities law compliance but not tax classification under IRC §1091.
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Conclusion
Currently, cryptocurrencies are not subject to the wash sales rule due to statutory definitions and legislative intent. However, investors should monitor:
- Pending legislation.
- IRS guidance updates.
- SEC enforcement actions.
Always consult a tax professional for entity-specific advice.