The Wash Sale Rule, and Why Crypto Sits Outside It

The move the rule is written against

Selling a losing position in December and buying it back in January produces a loss that can offset gains, while leaving the investor in the same economic position. The wash sale rule exists to stop that from producing a deduction twice.

The rule does not prohibit the transaction. It reclassifies the loss: the deduction is postponed, and the postponed amount is carried into the cost of the replacement position. That distinction matters, because a deferred loss is a very different thing from a forfeited one.

The rule, as written

Publication 550 states the core plainly: “You cannot deduct losses from sales or trades of stock or securities in a wash sale unless the loss was incurred in the ordinary course of your business as a dealer in stock or securities.”

It then defines the event: “A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you” do any of the following:

1. “Buy substantially identical stock or securities,”
2. “Acquire substantially identical stock or securities in a fully taxable trade,”
3. “Acquire a contract or option to buy substantially identical stock or securities, or”
4. “Acquire substantially identical stock for your individual retirement arrangement (IRA) or Roth IRA.”

Two extensions follow in the same paragraph: “If you sell stock and your spouse or a corporation you control buys substantially identical stock, you also have a wash sale.”

Four things in that definition are easy to underestimate.

The window looks backward as well as forward. Thirty days before the sale counts. An investor who buys first and sells later in the same month has created a wash sale without intending to.

It is not limited to the same account. Buying the replacement inside an IRA is expressly listed, which is why a sale in a taxable account followed by a repurchase in a retirement account can disallow the loss without producing any basis increase in the account that would eventually use it.

It is not limited to the same person. A spouse’s purchase, or a purchase by a corporation the seller controls, is attributed back.

It is not limited to a purchase of shares. An option or a contract to buy the stock is enough.

The basis adjustment, worked

The remedy is arithmetic, and Publication 550 gives it: “If your loss was disallowed because of the wash sale rules, add the disallowed loss to the cost of the new stock or securities … The result is your basis in the new stock or securities. This adjustment postpones the loss deduction until the disposition of the new stock or securities.”

The publication’s own example is the clearest version:

The investor has a 250 loss they cannot deduct and a position with a basis 250 higher than what they paid. If the replacement shares are later sold at 1,050, the position breaks even for tax purposes despite having gained 250 since purchase — the deferred loss is recognised then.

The holding period follows the same logic. Publication 550 states that “your holding period for the new stock or securities includes the holding period of the stock or securities sold.” An investor who held the original position for eleven months and repurchases does not restart the one-year clock; the replacement shares are already long-term for the period inherited.

Substantially identical is a judgement

The rule turns on a phrase it does not define numerically. Publication 550 says only that “in determining whether stock or securities are substantially identical, you must consider all the facts and circumstances in your particular case.”

It then gives two anchors:

• “Ordinarily, stocks or securities of one corporation are not considered substantially identical to stocks or securities of another corporation.” Two different issuers are usually safe.
• The exception: “in a reorganization, the stocks and securities of the predecessor and successor corporations may be substantially identical.”

And a closer case inside one issuer: “bonds or preferred stock of a corporation are not ordinarily considered substantially identical to the common stock of the same corporation. However, where the bonds or preferred stock are convertible into common stock of the same corporation, the relative values, price changes, and other circumstances may make these bonds or preferred stock and the common stock substantially identical.”

The publication then lists five conditions under which convertible preferred is substantially identical to the common, including conversion rights, equal voting rights, the same dividend restrictions, prices that track the conversion ratio, and unrestricted convertibility.

The pattern is a sliding scale from identity to similarity. What the publication does not resolve is the case most investors actually face: two exchange-traded funds from different issuers tracking the same index, or a fund and its swap-based clone. The text’s “different corporation” default points one way; the economics point the other. Anyone who wants certainty should not rely on an assumption either way.

Detail: matching when the quantities differ

Buying fewer replacement shares than you sold does not exempt the whole loss. Publication 550 sets a matching procedure: “you must determine the particular shares to which the wash sale rules apply. You do this by matching the shares bought with an equal number of the shares sold. Match the shares bought in the same order that you bought them, beginning with the first shares bought.”

The publication’s example: 100 shares sold at a 1,000 loss, with 75 shares repurchased in two lots inside the window. Three quarters of the loss, 750, is disallowed and allocated across the two lots in proportion to their size; the remaining 250 is deductible. The allocation is not optional, and it changes the basis of specific lots rather than the position as a whole.

A second detail closes a loophole: “Loss from a wash sale of one block of stock or securities cannot be used to reduce any gains on identical blocks sold the same day.” A disallowed loss cannot be netted against a gain on another lot in the same security.

What the rule does and does not reach

The two exclusions are worth noticing because they are explicit rather than inferred. The publication says the wash sale rules “apply to losses from sales or trades of contracts and options to acquire or sell stock or securities” and “do not apply to losses from sales or trades of commodity futures contracts and foreign currencies.”

The dealer exception is the other carve-out: the rules “do not apply to a dealer in stock or securities if the loss is from a transaction made in the ordinary course of business.”

Why crypto is different, and how confident to be

The wash sale rule is written for “stock or securities”. A digital asset is neither, in the IRS’s own framing.

The IRS digital assets page states: “For U.S. tax purposes, digital assets are considered property, not currency.” Notice 2014-21 says the same in its first question and answer: “For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.”

Property is not stock, and property is not a security. The rule that defers a stock loss does not, on its face, reach a loss on the sale of property. That is the basis on which practitioners generally treat the wash sale rule as not applying to spot crypto — and it is a reading of the statute’s wording, not the product of a published ruling applying the rule to digital assets.

Three cautions follow:

1. The reasoning is textual. It depends on the rule naming stock or securities. A change in guidance or legislation could close the gap, and the position is worth re-checking rather than assuming permanently.
2. A wrapper can change the answer. An exchange-traded fund holding crypto, or a securities future on it, is a security. Selling one and buying a substantially identical one inside 30 days is a wash sale question in the ordinary way.
3. The reporting is converging. Brokers now report digital asset proceeds on Form 1099-DA, with basis reporting phased in for later years. Better reporting does not create a wash sale rule for crypto, but it does mean the transactions are more visible than they were.

The practical asymmetry is real and it is large: a US equity investor who sells at a loss and buys back within a month has deferred the deduction, while a crypto investor doing the same thing on a spot venue has, under the current reading, a deductible loss and an unchanged position. That difference is a feature of the statute’s scope, not an invitation to assume the two are treated alike everywhere.

A checklist for the December trade

1. Count 30 days in both directions from the sale, and include purchases in retirement accounts and by a spouse.
2. Decide the identity question before the trade, not after — substantially identical is a facts-and-circumstances test with no safe harbour for similar funds.
3. Expect the basis to carry the loss, and adjust the replacement lot’s cost so the later sale is computed correctly.
4. Keep the original holding period, because the replacement inherits it.
5. Do not net a disallowed loss against a same-day gain in the same security.
6. For crypto, read the instrument, not the venue. Spot is property; a fund or a future is a security, and the rule follows the instrument.

Risk note. The wash sale definition, basis adjustment, matching procedure and instrument exclusions in this article were read from IRS Publication 550; the property treatment of digital assets from Notice 2014-21 and the IRS digital assets page, all on 2026-10-27. Tax law and guidance change, and individual circumstances differ. This is not tax advice.