Loophole: Harvest Tax Losses on Cryptocurrency

Because cryptocurrencies are classified as “property” rather than as securities, the wash-sale rule does not apply to them. (The wash-sale rule prohibits a taxpayer from deducting a loss on a sale of an investment that was replaced with the same or a "substantially identical" investment 30 days before, on the day of the sale, or 30 days after the sale.)

Let’s look at how to harvest crypto losses:

• When a currency you own has substantial unrealized losses you can sell to generate losses that are not limited to $3,000 per year.

• You can immediately replace your position in the currency without invoking the wash sale rule that would otherwise prohibit you from deducting the loss.

• This allows you to take losses without losing your position in the currency investment. You do incur trading expenses, however.