It's the last week of November, and a client is holding a token that's down $40,000 from where they bought it. They want to sell for the loss and buy the same token back that afternoon, something they'd never try with a stock in their brokerage account. They want to know whether that's a smart move or a trap.
The answer today sits in between. IRC Section 1091, the wash sale rule, is written for "stock or securities," and it doesn't expressly name digital assets. The Joint Committee on Taxation's description of present law says the IRS has issued no regulations or guidance addressing whether the rule applies to them.
Many practitioners read the statute as not covering ordinary spot crypto. That is an interpretation of existing law, not an IRS safe harbor.
What keeps this from being a settled loophole is timing. On September 16, 2026, the House Ways and Means Committee advanced a bill that would extend the wash sale rule to traded digital assets, and as introduced it would apply to dispositions after September 14, 2026.
This guide separates what's settled from what isn't, walks through the tax loss harvesting rules and the loss limit, explains where capital gain distributions fit, and flags the places where crypto exposure already sits inside the wash sale rule.
Section 1091(a) applies when a taxpayer sells or otherwise disposes of shares of stock or securities at a loss and, within the period beginning 30 days before and ending 30 days after that sale, acquires substantially identical stock or securities. The acquisition can be a purchase, a fully taxable exchange, or a contract or option to acquire them. If it happens, the loss is not deductible under Section 165, unless the taxpayer is a dealer and the loss arises in the ordinary course of that business.
The loss isn't erased. It moves into the replacement position, which is why the rule is a deferral for most investors and a permanent loss in a few traps:
| Feature | How it works |
|---|---|
| Window | 30 days before the sale through 30 days after, 61 days in total |
| What triggers it | A purchase, a fully taxable exchange, or a contract or option to acquire substantially identical stock or securities |
| Effect on the loss | Disallowed as a deduction under Section 165 for the year of the sale |
| Basis | Generally, the disallowed loss is reflected in the basis of the replacement under Section 1091(d). If fewer shares are acquired than were sold, only the loss on the matched shares is disallowed (see Publication 550) |
| Holding period | Generally, where the replacement's basis is determined by reference to the position sold, Section 1223(3) adds the holding period of the position sold |
| IRA purchases | A replacement bought in an IRA still triggers the rule, and the IRA's basis is not increased (Rev. Rul. 2008-5) |
The IRA row is the one that turns a deferral into a permanent loss. The disallowed loss has nowhere to go, because an IRA has no basis to increase.
Two things support that reading, and neither is a ruling on crypto and the wash sale rule.
Section 1091 speaks of "shares of stock or securities." The only definition the statute gives is an extension: for purposes of the section, the term includes contracts or options to acquire or sell stock or securities. Digital assets aren't mentioned, and the Joint Committee on Taxation notes that Section 1091 doesn't reach all fungible, publicly traded property either.
Its examples are foreign currency (Rev. Rul. 74-218) and commodities (Rev. Rul. 71-568), neither of which is stock or securities for this purpose.
Notice 2014-21 treats virtual currency as property, and general tax principles for property apply. The IRS's own FAQs add that a sale of virtual currency produces a capital gain or loss, subject to any limits on deducting capital losses.
The IRS's FAQs apply to taxpayers who hold virtual currency as a capital asset, so dealers, traders, and inventory holders start from a different place. Property that isn't stock or securities sits outside Section 1091, and that reasoning underlies the view many practitioners take.
Notice 2014-21 doesn't decide whether any particular digital asset is a security for Section 1091, though. The view is an interpretation of existing law, not a published IRS position, and the difference matters when a client asks how confident you are.
| Question | Where it stands | Basis |
|---|---|---|
| Is crypto property for federal tax purposes? | Settled, though capital treatment depends on the taxpayer's facts | Notice 2014-21 and the IRS virtual currency FAQs |
| Is a net capital loss from a crypto sale subject to the loss limit? | Settled, for taxpayers with capital losses | Section 1211(b) and IRS Topic 409 |
| Does Section 1091 expressly cover spot crypto? | Not expressly, and no specific IRS guidance addresses it | Statute text and the Joint Committee on Taxation's description of present law |
| Do crypto-linked ETPs and tokenized assets fall under Section 1091? | Depends on the instrument and whether it is stock or securities | The instrument's legal and tax status |
| When are two crypto-linked securities "substantially identical"? | Unsettled | Facts and circumstances, with no bright line |
| Could economic substance be raised against a same-day round trip? | Fact-dependent and unresolved | Section 7701(o), which applies only where the doctrine is relevant |
| Will Congress extend the rule to digital assets? | Pending | H.R. 10357, reported by Ways and Means, not enacted |
Once both positions are securities, the familiar question returns: what is substantially identical? The IRS has never published a definition, and although Publication 550 gives examples, it tells taxpayers to consider all the facts and circumstances of their particular case.
That makes two spot bitcoin funds from different issuers a real question rather than an easy answer. On the statute's own terms, selling spot crypto at a loss and buying a crypto fund afterward doesn't trigger Section 1091, because the asset sold wasn't stock or securities.
Section 7701(o) provides that where the economic substance doctrine is relevant, a transaction has economic substance only if it changes the taxpayer's economic position in a meaningful way, apart from tax effects, and the taxpayer has a substantial purpose for entering it. The statute leaves relevance to be decided the way it was before codification.
A same-day sale and repurchase may prompt a client or a reviewer to ask whether the doctrine could matter, but that is a fact-dependent question, not a second wash sale rule and not a predictable challenge. We are not aware of a published ruling or decision applying the doctrine to crypto loss harvesting, so the sensible step is to document the investment reasoning behind the trade.
Tax loss harvesting means selling a position at a loss on purpose to use the loss against gains or income. The mechanics of the rules are the same for crypto and stocks: net short-term and long-term gains and losses separately, then combine the results.
If capital losses exceed capital gains, the lesser of $3,000 ($1,500 if married filing separately) or the net loss reduces other income, and the rest is carried forward. The IRS's Topic 409 states the limit, and the carryover keeps its short-term or long-term character in later years.
A worked example shows the limit at work. The client bought the token in 2025 for $70,000 and sells it in November 2026 for $30,000, treating everything as long-term for simplicity and assuming no other capital gains, losses, or adjustments:
| Item | Amount |
|---|---|
| Loss on the token | ($40,000) |
| Long-term gain on a stock sale earlier in the year | $15,000 |
| Capital gain distribution from a fund | $6,000 |
| Net capital loss | ($19,000) |
| Deductible against ordinary income this year | $3,000 |
| Carried forward to 2027 | $16,000 |
The $3,000 figure is the piece clients underestimate. A large harvested loss with too few gains to absorb it turns into a slow carryforward, not a large current deduction.
When a client holds units bought at different prices, the units sold decide the size of the loss. Under the 2026 Form 1099-DA instructions, a broker reports a sale according to the customer's adequate and timely identification of the units. Without one, the broker generally reports the earliest units purchased first.
Basis reporting is also new. For sales after 2025, brokers must report basis for covered securities, meaning digital assets acquired after 2025 in a custodial account and held there until sold. Units bought earlier, or transferred in, are noncovered, and the client's own records carry the basis.
Mutual funds and many ETFs pass their realized gains to shareholders as capital gain distributions, reported on Form 1099-DIV. Publication 550 treats them as long-term gains regardless of how long the shareholder held the fund.
That's why harvested losses matter beyond the security that generated them. A crypto loss can offset a fund's capital gain distribution in the same return, which is often the largest gain a passive investor didn't choose to realize.
Two cautions belong in the client conversation. A purchase of fund shares by reinvesting a distribution is still a purchase, so it can fall inside the 61-day window of a loss sale of the same fund. And buying a fund shortly before it declares a distribution brings the client a taxable gain they didn't earn, which harvesting can then offset but not erase.
The reading above is about ordinary spot crypto. It doesn't carry over to instruments that are stock or securities, and each instrument needs its own analysis.
Box 1i is a reporting rule. It tells brokers when to report a Section 1091 disallowed loss on a tokenized security treated as stock or securities, and it doesn't decide which digital assets are stock or securities under Section 1091. A broker's silence on wash sales for spot crypto isn't a conclusion that the rule can't apply.
The proposal first appeared in H.R. 9172, introduced June 8, 2026 by Rep. Jodey Arrington.
The same anti-abuse title now sits inside H.R. 10357, the Digital Asset Tax Certainty Act, which the Ways and Means Committee approved by a 38 to 5 vote on September 16, 2026. The Joint Committee on Taxation's description of the bill as introduced is the most reliable summary of the wash sale terms:
The same bill would let taxpayers elect a simplified accounting method for widely traded digital assets, effective for tax years beginning after 2027, and for the designated type of asset that method switches off the wash sale and constructive sale rules. It would also let digital asset dealers and traders elect mark-to-market accounting.
Committee approval is a step, not enactment. The Joint Committee on Taxation's description covers the bill as introduced on September 14, and the committee's release reports approval without setting out the reported text. Confirm the terms and the effective date against the reported bill before relying on them.
We found no report of House floor action as of September 28, 2026, and Senate action would also be required.
H.R. 9172 disclaimed any inference about how current law treats earlier periods, which is consistent with the point that this remains an open question rather than a confirmed gap.
Most of what makes this hard isn't the rule; it's the source hierarchy. A statute that doesn't mention crypto, an agency that hasn't spoken, and a bill that changes weekly all need to be cited separately, with the date of each. Bizora's guide to writing a tax research memo covers how to document that reasoning, which is what makes the position defensible if the IRS asks.
Bizora's overview of the Form 1099-DA reporting rules covers the reporting side. Bizora AI traces answers like these back to the Code section, Treasury regulation, or IRS notice behind them, with a View Steps reasoning path showing how the conclusion was reached.
The settled part is short: crypto is property, a loss sale by a taxpayer who holds it as a capital asset generally produces a capital loss, and the net loss runs into the $3,000 limit. The unsettled part is the one clients ask about, and it comes with a date attached.
Confirm whether the position is spot crypto or a security, and what kind of security, check whether the loss sale falls after September 14, 2026, and write down the reasoning before the trade instead of after the notice. Bizora's guide to related-party loss rules under Section 267 is a useful companion when a client's plan involves selling the loss position to a spouse or a controlled entity instead of into the market.
Research your next crypto loss or wash sale question in Bizora AI: the 7-day free trial requires no credit card.
Section 1091 applies to stock or securities and doesn't expressly name digital assets. The IRS hasn't issued specific guidance on spot crypto, and many practitioners read the statute as not covering it, but that's an interpretation, not a safe harbor. Crypto-linked instruments that are securities may be covered, depending on the facts.
Many practitioners read Section 1091 as not blocking the loss on ordinary spot crypto, but that reading isn't confirmed by the IRS. Pending legislation would apply the wash sale rule to dispositions after September 14, 2026, if enacted as introduced, so timing and documentation deserve attention.
Shares of a spot bitcoin exchange-traded product are generally securities traded in a brokerage account and reported on Form 1099-B, so the rule generally applies. Other crypto-linked products depend on their terms. Whether two funds are substantially identical turns on the facts and circumstances, and the IRS hasn't published a definition.
Capital losses offset capital gains without limit. If losses exceed gains, the lesser of $3,000 ($1,500 if married filing separately) or the net loss reduces other income each year. Any remainder carries forward indefinitely and keeps its short-term or long-term character, according to IRS Topic 409.
Funds pass realized gains to shareholders as capital gain distributions, reported on Form 1099-DIV and taxed as long-term gains regardless of how long the shares were held. A harvested loss offsets them like any other capital gain. Reinvested distributions can also count as purchases inside a wash sale window.
It might. H.R. 10357 cleared the House Ways and Means Committee 38 to 5 on September 16, 2026, and would extend Section 1091 to traded digital assets. It hasn't been enacted, the reported text may differ from the introduced bill, and both chambers would need to act.
The 2026 instructions provide box 1i for wash sale losses on tokenized securities treated as stock or securities under Section 1091. Brokers must report the disallowed loss when the sale and repurchase occur in the same account with the same CUSIP. Box 1i is a reporting rule, and it doesn't decide the scope of Section 1091.
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