Does the Wash Sale Rule Apply to Crypto? (2026 Update)

If you sell a stock like Tesla at a loss and buy it back the next day, the IRS disallows the tax deduction. This is the “Wash Sale Rule.” But for Bitcoin and Ethereum, the rules are different. Because the IRS classifies cryptocurrency as “Property” (like a house) rather than a “Security” (like a stock), the Wash Sale Rule technically does not apply as of early 2026. However, abusing this loophole carries a massive hidden risk called the “Economic Substance Doctrine.”

BMT Tax Team BMT Tax Team · 📅 Feb 2026 · ⏱️ 5 min read · TAX TIPS › CRYPTO
Stocks
30 Days
Wait PeriodRule
Crypto
0 Days
Technically AllowedFact
Risk
Audit
Economic SubstanceWarn

1. The Rule: Property vs. Security

The entire loophole hinges on one definition.

Why Crypto is Different
Stocks (Securities): Subject to Section 1091 (Wash Sales). If you replace a stock within 30 days before or after the sale, the loss is deferred.
Crypto (Property): Subject to Notice 2014-21. Property is not subject to Section 1091. Therefore, you can harvest losses aggressively.
NFTs: Also treated as property (generally), so the same loophole applies.

2. Stock vs. Crypto Strategy (Checklist)

See how the rules favor crypto traders (for now).

Scenario Stock (e.g., Apple) Crypto (e.g., Bitcoin)
Action Sell at $5k Loss.
Buy back next day.		 Sell at $5k Loss.
Buy back next day.
Tax Result Loss Disallowed
(Added to cost basis)		 Loss Allowed
(Deduct from gains)
Restriction Must wait 31 days. No statutory wait time.

3. Timeline: The “Economic Substance” Risk

Just because you can doesn’t mean you should do it instantly. The IRS looks at the timeline to determine intent.

Gap Time Status IRS Risk Level
< 1 Minute High Risk
“Sham Transaction” Likely
12 – 24 Hours Medium
Market Risk Existed (Defensible)
3+ Days Safe
Clear Economic Risk Taken
Planning Note
To minimize audit risk while harvesting crypto losses, it is generally safer to wait at least 24 hours between selling and rebuying, so you can prove to the IRS that you were exposed to market risk (price fluctuation) during the gap.

4. Strategy: The “Swap” Technique

How to stay in the market without triggering red flags.

  • The Goal: You want to harvest a loss on Bitcoin but don’t want to miss a rally.
  • The Move: Sell Bitcoin (BTC) for a loss ➔ Immediately buy Ethereum (ETH) or a “Wrapped” Bitcoin ETF.
  • The Logic: Even if the Wash Sale Rule applied, BTC and ETH are not “substantially identical.” You maintain crypto exposure while locking in the tax deduction safely.

5. Warning: Pending Legislation

The party could end at any moment.

⛔ Retroactive Laws

Congress has proposed closing this loophole multiple times (e.g., Build Back Better).

  • The Risk: If a new tax bill passes in late 2026, it could be retroactive to the beginning of the year.
  • The Fix: Do not rely 100% on this loophole for your entire tax strategy. Keep a buffer of cash for taxes just in case the law changes mid-year.

6. Frequently Asked Questions

What about Crypto ETFs?
Watch out. Crypto ETFs (like IBIT or FBTC) are securities (stocks). They ARE subject to the 30-day Wash Sale Rule. The loophole only applies to the actual coins held in a wallet/exchange.
Does this apply to NFTs?
Generally, yes. NFTs are considered collectibles/property, so the wash sale rule likely does not apply. However, wash trading (buying your own NFT to pump the price) is fraud, not tax planning.