MSTR Cat

Crypto Law/Level VII · Loopholes worth understanding/7.1 Legal planning/Lesson 2

Tax-loss harvesting and the wash-sale gap

How realizing crypto losses can offset gains, why the US wash-sale rule does not reach most coins by its words, and the doctrines and costs that still apply.

Education, not legal, tax or investment advice. Crypto law differs between countries and states and changes often. Check the current rules where you live with a qualified lawyer or tax adviser before you act.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Harvest losses freely: the §1091 wash-sale rule covers only stock or securities and, as of October 2026, not ordinary coins, so realized losses offset gains plus $3,000 of other income a year, the rest carrying forward indefinitely (§1211(b), §1212(b)).
  2. Make the sale real: changing exposure or waiting before rebuying supports economic substance under §7701(o); a benefit denied for lacking substance draws a 20% penalty, or 40% if not adequately disclosed (§6662).
  3. Harvest when gains are taxed highest, especially short-term gains at ordinary rates up to 37%; the catch is that the repurchased coin’s lower basis and restarted holding period usually defer tax rather than erase it.
  4. Sell the highest-cost lot when harvesting, identified in your records or with the broker no later than the sale (Treas. Reg. §1.1012-1(j)); the loss must come from units in the wallet or account that sold, and Form 1099-DA reports the sale.
  5. The gap has edges: spot bitcoin exchange-traded shares and tokens that are securities fall within §1091’s 30-day window, and UK holders face HMRC’s same-day and 30-day matching rules, so quick buy-backs harvest nothing there.

Materials26 U.S.C. §1091 and §7701(o) on law.cornell.eduTreasury’s General Explanations of the FY2025 revenue proposals (March 2024), the wash-sale proposal for digital assetsYour realized gains and losses so far this year and any capital loss carryforward from last year’s Schedule D

Wonder

  1. Is it legal to sell a coin at a loss and buy it straight back?
  2. If the wash-sale rule does not apply, what else could stop the loss?
  3. Does harvesting a loss save tax, or only delay it?

Explore

  1. Tax-loss harvesting means deliberately realizing losses, by selling or swapping assets worth less than their basis, so the losses offset realized gains. Lesson 2.3.3 covered the base rules in US federal tax: losses net against gains, an individual can deduct only $3,000 of net capital loss against other income per year under 26 U.S.C. §1211(b), and the rest carries forward under §1212(b) with no expiry date for individuals. Harvesting is common with shares. With crypto it draws extra attention because one rule that limits it for shares does not, by its words, reach most coins.
  2. That rule is the wash-sale rule in §1091. It disallows a loss on a sale of ‘shares of stock or securities’ if substantially identical stock or securities are acquired within 30 days before or after the sale. The IRS has treated virtual currency as property since Notice 2014-21, without calling a typical coin a stock or security, and as of October 2026 §1091 has not been amended to cover digital assets. That is the wash-sale gap: the statute does not disallow a loss on a coin sold and soon bought back. Treasury’s March 2024 General Explanations proposed closing the gap, including purchases by related parties such as the seller’s IRA; it was not enacted.
  3. The gap is in one statute, not in the whole tax code. Since 2010, 26 U.S.C. §7701(o) has codified the economic substance doctrine: where it is relevant, a transaction has economic substance only if it changes the taxpayer’s economic position in a meaningful way apart from tax, and the taxpayer has a substantial non-tax purpose. A tax benefit disallowed under that doctrine draws a 20% penalty under §6662(b)(6), raised to 40% under §6662(i) when the transaction was not adequately disclosed. Nothing in §1091 prevents the IRS from raising that doctrine against a sale and buy-back that changed nothing but the tax return.
  4. Where the asset is itself a stock or security, the gap does not obviously apply. Shares of the spot bitcoin exchange-traded products the SEC approved for listing on 10 January 2024 are exchange-traded shares, and a token that is a security under the tests in Level 3 falls within the statutory words. Brokers also report more now: Form 1099-DA reports gross proceeds for sales from 2025, and basis for digital assets acquired in a custodial account from 1 January 2026 (lesson 2.3.5), so a loss sale and a quick repurchase both appear on the record the IRS receives.
  5. Harvesting usually delays tax rather than erasing it. A coin sold at a loss and bought back gets a new, lower basis, so a later sale shows a larger gain, and the holding period restarts, so that future gain may be short-term (lesson 7.1.1). Spreads and fees are real costs, and swapping into a ‘similar’ coin to stay exposed is itself a disposal of the first coin. Which lot is sold decides how large the loss is: under the per-wallet rules from 2025, a loss must come from units in the wallet or account that sold, and the lot must be identified in time (lesson 7.1.7).
  6. Other countries close the gap directly. In the UK, HMRC’s Cryptoassets Manual applies a same-day rule and a 30-day rule (TCGA 1992 sections 105 and 106A): tokens of the same type bought back within 30 days of a disposal are matched to that disposal rather than to the pool, which largely removes the benefit of a quick buy-back. A practical check: list positions below cost, your realized gains so far this year and any carryforward, and note the lot dates behind each loss. This lesson explains the rules; it does not recommend harvesting or repurchasing, which a qualified tax adviser can review.

Key facts

  • 26 U.S.C. §1091 disallows losses on sales of shares of stock or securities when substantially identical stock or securities are acquired within 30 days before or after the sale.
  • As of October 2026, §1091 has not been amended to cover digital assets.
  • Treasury’s FY2025 General Explanations (March 2024) proposed applying the wash-sale rules to digital assets and to purchases by related parties, including IRAs; the proposal was not enacted.
  • 26 U.S.C. §7701(o) treats a transaction as having economic substance only if it meaningfully changes the taxpayer’s economic position apart from tax and has a substantial non-tax purpose.
  • A disallowed benefit from a transaction lacking economic substance carries a 20% penalty under §6662(b)(6), or 40% if not adequately disclosed under §6662(i).
  • HMRC applies a same-day rule and a 30-day rule to cryptoassets, matching tokens reacquired within 30 days to the earlier disposal.

Exercise nine, six, three, one

9CollectList up to 9 positions you hold or have studied that are worth less than their basis, with the basis, current value, wallet or account, and acquisition date.
6ClusterSort them into 6 categories: coins that are not securities, exchange-traded fund shares, tokens that may be securities, positions held in a retirement account, positions with incomplete records, and positions you intend to keep regardless of tax.
3DistillReduce the 6 categories to 3 groups: losses outside the wash-sale wording, losses inside it, and losses where records or labels are uncertain.
1CrystallizeWrite 1 sentence explaining, in your own words, why a gap in the wash-sale statute is not the same as permission to ignore substance.

Fact check

Dates, figures and claims checked against the published sources listed below.

Open in the interactive academy →

PT ES ZH JA KO RU DE FR MS