is Bitcoin subject to wash-sale rules?

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dollarsansense
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is Bitcoin subject to wash-sale rules?

Post by dollarsansense »

Are Cryptocurriences specifically Bitcoin subject to the same wash-sale rules as stocks or ETFs? I always assumed one could tax loss harvest between BTC and ETH to maintain an ongoing allocation in crypto. But today's drawdown had be wondering if there was any governance prohibiting a pure wash sale on recently purchased BTC.

Does anyone have any definitive knowledge or experience with this?
dru808
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Re: is Bitcoin subject to wash-sale rules?

Post by dru808 »

Good question. Curious as well.
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Gadget
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Re: is Bitcoin subject to wash-sale rules?

Post by Gadget »

Seems to me that it's still a grey area because the IRS hasn't clarified if wash sales exist for crypto. But reading the letter of the law, it seems that wash sales only apply to securities. And didn't the courts determine that bitcoin isn't a security? I would think that means you can harvest losses on your crypto "property" and immediately buy back.

It would just be a pain to figure out the taxes unless you keep detailed records. Unless there are Turbotax like products for the crypto world, or the exchanges do it for you and I am just unaware.
bugleheadd
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Re: is Bitcoin subject to wash-sale rules?

Post by bugleheadd »

Is it a currency or maybe like buying gold?

Do wash sales apply to currency or gold?
JEC
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Re: is Bitcoin subject to wash-sale rules?

Post by JEC »

No, Bitcoin is not subject to wash sale rules. As one of the previous posters mentioned, it's not considered a security. It's considered property, so wash sale rules do not apply.
alex_686
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Re: is Bitcoin subject to wash-sale rules?

Post by alex_686 »

JEC wrote: Tue Jan 12, 2021 8:04 am No, Bitcoin is not subject to wash sale rules. As one of the previous posters mentioned, it's not considered a security. It's considered property, so wash sale rules do not apply.
If it is not a security what is it? And how should it be taxed?

2 thoughts on this.

The IRS can takes a dim view if a filer relies on technicalities if it used to get around the spirit of the law.

The tax rules for currency traders are complex. If Bitcoin was a currency then almost everybody trading Bitcoin would be classified as one.
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geerhardusvos
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Re: is Bitcoin subject to wash-sale rules?

Post by geerhardusvos »

Next up, “why isn’t bitcoin available in my 401(k)?”
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HootingSloth
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Re: is Bitcoin subject to wash-sale rules?

Post by HootingSloth »

I would advise some caution on this question. The arguments that the statutory wash sale rules under section 1091 do not apply to Bitcoin (because it is not a "stock" or "security" for tax purposes) appear strong. However, prior to the enactment of section 1091, courts reached a similar result in denying tax losses for sales and repurchases of identical property over short time periods. These rulings relied on a common law approach that held the relevant property had not, in substance, been sold or exchanged and so a loss had not been realized. Even if section 1091 does not apply to sales of Bitcoin, these common law principles could still apply. A tax lawyer could help you navigate this issue and mitigate the risk of a loss being denied.
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arcticpineapplecorp.
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Re: is Bitcoin subject to wash-sale rules?

Post by arcticpineapplecorp. »

why would it matter? Bitcoin only goes UP, right? :twisted:
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Nate79
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Re: is Bitcoin subject to wash-sale rules?

Post by Nate79 »

Not an expert but I don't see how you could claim a loss if wash sales do not apply.
dukeblue219
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Re: is Bitcoin subject to wash-sale rules?

Post by dukeblue219 »

Nate79 wrote: Tue Jan 12, 2021 11:28 am Not an expert but I don't see how you could claim a loss if wash sales do not apply.
wash sale restrictions may not apply, but gains are absolutely taxable with crypto unless you can delay them with losses.
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willthrill81
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Re: is Bitcoin subject to wash-sale rules?

Post by willthrill81 »

alex_686 wrote: Tue Jan 12, 2021 8:11 am
JEC wrote: Tue Jan 12, 2021 8:04 am No, Bitcoin is not subject to wash sale rules. As one of the previous posters mentioned, it's not considered a security. It's considered property, so wash sale rules do not apply.
If it is not a security what is it? And how should it be taxed?
These attorneys make a good argument that the IRS will treat cryptocurrencies as commodities for taxation purposes. I've heard the same argument they make from others, FWIW.

But the IRS has explicitly said the following:
For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.
https://www.irs.gov/irb/2014-16_IRB#NOT-2014-21

So generally speaking, my understanding is that cryptocurrencies will be taxed in the same way as stocks, bonds, etc.

What all of this means for wash-sale rules, I don't know.
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EnjoyIt
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Re: is Bitcoin subject to wash-sale rules?

Post by EnjoyIt »

willthrill81 wrote: Tue Jan 12, 2021 11:42 am
alex_686 wrote: Tue Jan 12, 2021 8:11 am
JEC wrote: Tue Jan 12, 2021 8:04 am No, Bitcoin is not subject to wash sale rules. As one of the previous posters mentioned, it's not considered a security. It's considered property, so wash sale rules do not apply.
If it is not a security what is it? And how should it be taxed?
These attorneys make a good argument that the IRS will treat cryptocurrencies as commodities for taxation purposes. I've heard the same argument they make from others, FWIW.

But the IRS has explicitly said the following:
For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.
https://www.irs.gov/irb/2014-16_IRB#NOT-2014-21

So generally speaking, my understanding is that cryptocurrencies will be taxed in the same way as stocks, bonds, etc.

What all of this means for wash-sale rules, I don't know.
To my understanding property like commodities is taxed differently than equities.
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willthrill81
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Re: is Bitcoin subject to wash-sale rules?

Post by willthrill81 »

EnjoyIt wrote: Tue Jan 12, 2021 12:14 pm
willthrill81 wrote: Tue Jan 12, 2021 11:42 am
alex_686 wrote: Tue Jan 12, 2021 8:11 am
JEC wrote: Tue Jan 12, 2021 8:04 am No, Bitcoin is not subject to wash sale rules. As one of the previous posters mentioned, it's not considered a security. It's considered property, so wash sale rules do not apply.
If it is not a security what is it? And how should it be taxed?
These attorneys make a good argument that the IRS will treat cryptocurrencies as commodities for taxation purposes. I've heard the same argument they make from others, FWIW.

But the IRS has explicitly said the following:
For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.
https://www.irs.gov/irb/2014-16_IRB#NOT-2014-21

So generally speaking, my understanding is that cryptocurrencies will be taxed in the same way as stocks, bonds, etc.

What all of this means for wash-sale rules, I don't know.
To my understanding property like commodities is taxed differently than equities.
There are similarities, but there are differences as well. But I'm not a tax expert, nor did I stay at a Holiday Inn Express last night.
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DinkinFlicka
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Re: is Bitcoin subject to wash-sale rules?

Post by DinkinFlicka »

This Reddit post by a tax attorney from 2014 indicates that the loss might be disallowed by virtue of the Economic Substance Doctrine.
...


#9 Do the wash sale rules apply to bitcoin?

Probably not. The wash sale rules under Section 1091 apply only to "shares of stock or securities." Therefore, they do not apply to bitcoins unless bitcoins (and virtual currencies in general) qualify as "shares of stock or securities." This qualification would seem highly unlikely. There's just really no argument that bitcoins are "shares of stock or securities." The definition for these terms (taken from Section 1236, for example) is "any share of stock in any corporation, certificate of stock or interest in any corporation, note, bond, debenture, or evidence of indebtedness, or any evidence of an interest in or right to subscribe to or purchase any of the foregoing." Bitcoins would not appear to meet this definition.

So, as it's currently written, it does not look like Section 1091 applies to bitcoins and other virtual currencies. That could change in the future of course, but for the moment it seems to be the case.

#10 So can I use a wash sale to generate losses on bitcoin?

Yes. If bitcoins do not qualify as "shares of stock or securities" under Section 1091, then the rules do not apply. This mean that you can sell bitcoins to realize a loss, and then buy them back again to preserve your investment. However, that's not the end of the story. The IRS can attack this transaction with the "economic substance" doctrine, discussed below.

Example: Bob has capital gains from the sale of stock in Apple. He also has some bitcoins that he purchased for $1,200 each last November, but are worth only $300 currently. In order to offset the gains on his shares of stock, Bob sells his bitcoins for a loss of $900 each. He immediately repurchases the same amount of bitcoin, thereby creating a tax loss but not actually giving up his investment in bitcoin.

#11 What is the Economic Substance Doctrine?

The "economic substance doctrine" is a doctrine in US tax law that says a transaction must have economic significance aside from it's tax effects. Basically, a transaction that does nothing else but generate tax benefit is invalid under this doctrine. The parties to the transaction must actually incur some economic benefit or suffer some economic loss in order for it to be recognized by the IRS. A transaction that does neither, but still manages to generate some kind of tax benefit, will be invalid under this doctrine. It's become a very powerful tool for the IRS in attacking tax shelters and the courts are generally pretty supportive of the doctrine.

Because a bitcoin wash sale leaves you in the same economic position, but has generated a tax loss for your benefit, I wouldn't be surprised to see the Economic Substance Doctrine used to invalidate wash sales of bitcoins that would otherwise avoid Section 1091.

Example: The IRS audit's Bob from the previous example and discovers that he sold bitcoins in order to generate a tax loss, and then immediately repurchased the same amount of coins just moments later. The IRS will claim the transaction lacked economic substance and will disallow the loss.
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anon_investor
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Re: is Bitcoin subject to wash-sale rules?

Post by anon_investor »

geerhardusvos wrote: Tue Jan 12, 2021 8:57 am Next up, “why isn’t bitcoin available in my 401(k)?”
It kind of is indirectly already. If you hold a total stock market index, you likely have Square, and they directly invest in bitcoin. Another example of why VTSAX and chill wins!
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geerhardusvos
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Re: is Bitcoin subject to wash-sale rules?

Post by geerhardusvos »

anon_investor wrote: Wed Jan 13, 2021 12:41 am
geerhardusvos wrote: Tue Jan 12, 2021 8:57 am Next up, “why isn’t bitcoin available in my 401(k)?”
It kind of is indirectly already. If you hold a total stock market index, you likely have Square, and they directly invest in bitcoin. Another example of why VTSAX and chill wins!
Invest in Bitcoin” 🤔🤔🤔

Square bought about $50 million. That’s my budget for the relatively small team I lead at megacorp. It’s really not that much money and not much more than a publicity stunt.

Apple holds a lot of cash. I guess I get that indirectly too?
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anon_investor
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Re: is Bitcoin subject to wash-sale rules?

Post by anon_investor »

geerhardusvos wrote: Wed Jan 13, 2021 1:17 am
anon_investor wrote: Wed Jan 13, 2021 12:41 am
geerhardusvos wrote: Tue Jan 12, 2021 8:57 am Next up, “why isn’t bitcoin available in my 401(k)?”
It kind of is indirectly already. If you hold a total stock market index, you likely have Square, and they directly invest in bitcoin. Another example of why VTSAX and chill wins!
Invest in Bitcoin” 🤔🤔🤔

Square bought about $50 million. That’s my budget for the relatively small team I lead at megacorp. It’s really not that much money and not much more than a publicity stunt.

Apple holds a lot of cash. I guess I get that indirectly too?
BRK-B holds a ton of cash... who needs fixed income? :twisted:
SemiRetire
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Re: is Bitcoin subject to wash-sale rules?

Post by SemiRetire »

geerhardusvos wrote: Tue Jan 12, 2021 8:57 am Next up, “why isn’t bitcoin available in my 401(k)?”
GBTC is available in many IRA and 401k. If you can buy stock, you can often buy GBTC
SemiRetire
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Re: is Bitcoin subject to wash-sale rules?

Post by SemiRetire »

In terms of wash sale rule, what I have read many times is no, since not a security not subject per se to wash rule.

There is a general rule that the transaction has to be done for an investing purpose, and not just tax avoidance. forget the phraseology. But in terms of this aspect, as long as you do not come out and specifically say, hey I am tax loss harvesting here! You are fine, and in essence, no wash sale rule applies to bitcoin.

I have also read it said the same of other cryptocurrencies as well, no wash rule, but much more grey there I imagine, and may have changed since I read it 1-2 years ago.
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Re: is Bitcoin subject to wash-sale rules?

Post by UpsetRaptor »

IRS notice 2014-21 from March 2014 addressed cryptocurrency:
https://www.irs.gov/pub/irs-drop/n-14-21.pdf

Cryptoassets are classified as "property", not securities or currency. According to the notice, you do have to report capital gains, and can leverage losses for the typical things like TLH.

My understanding is that for property, such as real estate, wash sale rules do not apply.
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