He said the IRS considers the following activities crypto sales: exchanging crypto for U.S. dollars or fiat currencies (backed by a nation); exchanging one type of crypto for another; or purchasing goods or services with cryptocurrency.
But there are gray tax areas in the wash-sale rules, which were recently loosened for crypto. “The statutory application of the wash-sale rule is that it only applies to securities and equities repurchased within a short period after the tax-loss event,” said Cardinale, “but the IRS has explicitly labeled cryptocurrency ‘property,’ which is not equity or a security in its purest sense. A reasonable tax position could be crafted that allows for cryptocurrency tax losses even if the same cryptocurrency is immediately repurchased.”
(He does urge caution in certain circumstances when buying crypto through a publicly traded vehicle, possibly turning the crypto into a security and igniting the wash-sale rule.)
“The rules are well defined because the taxation of property has been well defined for years,” Hopkins said. And “the IRS has been clear: It’s up to the individual to track things like basis, fair market value and transactions.”
“Keep good records of all crypto-related activity for each year,” Bennett said. And hold crypto for a year or more to secure long-term capital gains rates and avoid higher ordinary income tax rates. “The market for various crypto-related investments has been incredibly volatile, so patience may prove beneficial not only for an investment strategy but also for tax planning,” he said.