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What is the IRS ‘wash cell’ rule – and does it apply to cryptocurrency losses?


The stock rises. The stock is declining. Although they have mostly grown so far this year, the bull market is not sustainable forever. And the price of a particular stock can fluctuate everywhere regardless of the overall trend line.

When you turn an unfortunate stock investment into a taxable brokerage firm account, the grace of saving is that you can claim a tax-saving capital loss exemption (within limits) when you sell. Right? Not necessarily. In fact, horrible wash sale rules can negate your tax savings.

The story here is about how the rules of selling sales work, including the question of whether it applies to cryptocurrency losses.

How the IRS ‘wash cell’ rule works

If the loss rate on the sale of shares of a stock or mutual fund is waived for the purpose of federal income tax, if the loss within 1 day starts 10 days before the date of sale and ends 10 days after that date, then you will buy enough securities. The theory is that the sale “sells” the loss within a 1-day period and the offset purchase of a sufficient amount of securities is an economic “wash”. Therefore, you are not entitled to any loss deduction, and the tax savings that will result from selling the loss in general are not allowed.

When there is an authorized loss of your wash sale, the loss simply does not evaporate (except when your IRA or regulated corporation achieves adequate uniform security, as explained later). Instead, the general rule is that the allowable loss is added to the substantial amount of the securities tax that introduces the wash sale rule. Then when you finally sell those significant identical securities, the extra base reduces your tax profit or your tax loss. Indeed, authorized loss becomes a delayed loss that is taken into account when you sell a sufficient number of securities.

Example: You bought 1,000 Beta Bank shares for ড 20,000 on 7/1/21 using your taxable brokerage firm account. Shares have declined. As a tax-smart person (or so you thought), you are reaping a ক্ষ 8,000 capital loss from শেয়ার 12,000 (ভিত্ত 20,000 basis – $ 12,000 sales revenue = $ 8,000 loss) on 12/15/21. You want to use that loss to cover the same amount of capital gains by 2021. Got the tax-saving loss (or so you thought), then you recover 1,000 beta shares for $ 12,200 on 12/19/21, because you still like the stock. Sadly, the wash sale rules do not allow for the deduction of your expected 8,000 capital loss. The unauthorized loss substantially increases the tax base of the securities – the beta shares you bought on 12/21/21 cost 20,200 (খরচ 12,200 cost + $ 8,000 authorized wash sale loss).

Two strategies to defeat the wash sales rule

Avoiding wash sale rules is only a problem when you want to sell a stock or security to reap a tax-saving capital loss, but still want to own the stock or security because you think it will appreciate from the current price.

One way to defeat the wash sales rule is to “double” the strategy. You will buy the same number of shares of the stock you want to sell for a loss. Then you wait 31 days to sell the original batch of shares. When all is said and done, you have sold your tax-saving loss, but you still own the same number of shares as before and so can still benefit from the expected appreciation.

Example: You currently want to sell 1,000 jet shares for 2021 tax-saving losses. But you don’t want to give up stock. So, at 11/21, you will buy another 1,000 Zeta shares. You can then sell the original batch of 1,000 shares for your tax-saving loss anytime between 12/22 and 12/31. Wash sale rules are avoided because 12/22 of 11/21 is more than 30 days.

Basically the same goal can be a much less expensive way to achieve. Try to buy a cheap call option on the stock you want to sell for 2021 tax loss. Then wait more than 30 days for the stock to sell.

Example: You currently own 1,000 Yazu shares that you would like to sell before the end of the year for the 2021 tax-saving capital loss. But you don’t want to give up stock. It could cost as little as ড 100 to buy an alternative to 1,000 Yazu shares in January 2020, while it could cost ড 10,000 or more to buy 1,000 actual shares. Say you buy a call option for 1,000 shares on 11/21. You can sell your 1,000 yazu shares that you currently sell between 12/22 and 12/31 and claim a tax-saving capital loss on your 2021 return, because you have successfully circumvented the sale rules. Be sure to wait at least 1 day before selling Yazu shares, as call options and stocks are considered to be fairly identical securities as per the rules of wash sale.

Deadline Warning: To use any of these strategies you need to take action on or before 11/30/21 to get enough time to sell 2021 losses without introducing a wash sale rule.

IRS says wash sale rules apply when your IRA acquires sufficient securities

Say you use your traditional theoretical IRA or Roth IRA to buy a sufficient amount of securities within 30 days before or after the sale of the loss in your taxable brokerage account. That wash triggers sales rules? According to the IRS (Revenue Ruling 2008-5), buying a sufficient amount of securities using the IRA actually introduces a laundry sale rule. Worse, the IRS says you can’t increase your IRA’s tax base by allowing losses. Permitted damage simply goes up in smoke.

Say you sold the stock for a loss, and your wife bought the same stock within the prohibited 61-day period? If you file jointly, the wash sale rules will clearly apply. IRS Publication 550 says the wash sale rules apply even if you and your spouse file separate returns.

According to IRS publication 550, the wash sale rule also applies when a sufficient quantity of securities is purchased by a corporation under your control.

Cryptocurrency losses apparently exempt from wash sale rules (for now)

Since the IRS classifies cryptocurrency as “property” rather than securities, the wash sale rule does not apply if you sell a cryptocurrency holding for a loss and acquire the same cryptocurrency shortly before or after the loss sale. Depending on your holding period you only have one garden-variety short-term or long-term capital loss. No wash sales rule concerns. This favorable federal income tax treatment is consistent with the long-term treatment of forex losses established by IRS Revenue Rule 74-218. This is a good thing, because some people actively trade cryptocurrencies, and prices can be volatile. Loss is not uncommon, and you want to be able to accurately claim any loss for tax-saving results.

Example: You bought a cryptocurrency and sold it at a loss of 35 35,000. Over the years, you have also mentioned large stock gains in your taxable brokerage firm account. You can offset some of your stock gains with a loss of ,000 35,000 from a lost cryptocurrency investment, even if you go back to the same cryptocurrency after the loss was sold. Reason: Cryptocurrency losses are exempt from laundering sales rules. At least for now.

However, losses from crypto-related securities, such as Coinbase Global Inc. Stock COIN,
-1.02%,
The sale of laundry may fall under the rules, as the rule applies to the loss of assets classified as securities for federal income tax purposes. For now, cryptocurrencies themselves are not classified as securities.

Bottom line

As the year draws to a close, reducing tax losses has become a popular pastime. But if you want to get the expected tax savings, remember the rule of thumb sales.



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