When Virtual Currency Positions Are Subject to the Wash Sales Rule


Author: Andrea S. Kramer, McDermott Will & Emery*

The statements in this document reflect guidance issued as of March 19, 2020.



The tax law has special rules that disallow a deduction for a loss on the sale of certain assets where the  taxpayer purchases the same or substantially similar assets a short time after the sale that triggered the  loss. These rules, called the wash sale rules apply to prevent taxpayers from reporting losses from  selling stockor securitiesas defined in the tax laws. Because virtual currencies are not viewed as  stock or securities for purposes of the wash sales rule, the loss disallowance rules of I.R.C. § 1091  arguably should not apply. If applicable, these rules prevent taxpayers from reporting tax losses without  substantially changing their economic positions. This Memorandum addresses possible application of  the wash sales rule to virtual currency. For a discussion of possible application of the tax straddle rules  to defer tax losses, see McDermotts Memorandum, When Virtual Current Positions are subject to the  Straddle Rules.” 

Operation of the Wash Sales Rule  

Taxpayers cannot deduct otherwise allowable losses if the losses are from a sale or other disposition of  stock or securities and the taxpayers acquire substantially identical stock or securities (by a purchase or  in a taxable transaction) within a period beginning 30 days before and ending 30 days after the date of  the disposition (the 61-day prohibited period).1

The tax basis of newly acquired stock or securities is adjusted to reflect the amount of loss that must be  deferred and is not immediately deductible. When the newly acquired stock or securities are  subsequently disposed of, this basis adjustment means that taxpayers have larger losses or smaller gains  to reflect the losses previously deferred.  

Limited to Stock or Securities Transactions  

Although the phrase stock or securities appears with slightly different meanings in various Code  provisions, that phrase is not defined in I.R.C. §1091 or the applicable Treasury regulations. What we  do know is that stock generally refers to shares of stock in a corporation. Securities typically refers to  notes, bonds, debentures, and other evidences of indebtedness. Some Code provisions have broader  definitions and include options. For example, I.R.C. § 1236(c) defines security for purposes of dealer  investment accounts to include any evidence of an interest in or right to subscribe to or purchase any of  the foregoing.When I.R.C. § 1091 was amended to provide that the wash sales rule includes entering  into a contract or option to acquire substantially identical stock or securities, Congress did not attempt to  define the term stock or securities. Rather, it simply amended I.R.C. § 1091 to include as securities  contracts or options to acquire stock or securities.  

The wash sales rule is based on mechanical rules and definitions. It does not grant the Treasury broad  anti-abuse authority to apply the rule to transactions beyond stock or securities. Further, because  commodities, commodity derivatives, and futures contracts are not stock or securities, the wash sales  rule does not apply to them.  

Application to Virtual Currency  

In Notice 2014-21, the IRS provided its view that convertible virtual currency is propertynot foreign  currencyfor federal tax purposes.2 The IRS does not address whether virtual currency is taxable as a  security. For a discussion of when virtual currency is treated as a security for tax purposes, see  McDermotts Memorandum, When Virtual Currency Positions Are Securities for Tax Purposes.”  Some convertible virtual currenciessuch as Bitcoinare likely to be treated as commoditiesfor tax  purposes, not as stock or securities. Actual units of convertible virtual currency, in and of themselves,  would not be treated as actual stock or securities. As a result, losses from the sale, exchange, or other  disposition of convertible virtual currencies are not deferred under the wash sales rules.  

There are some situations, however, where virtual currency positionssuch as certain initial coin  offerings (ICOs) and certain tokensmight be treated as securities under Supreme Court guidance and  SEC rules.3 This means that taxpayers need to consider the possibility that if the SEC treats particular  transactions as securities, the IRS might seek to apply the wash sales rule to those transactions.  

In circumstances where virtual currency transactions are not taxed as securities, taxpayers can sell  virtual currency at a loss and acquire substantially identical virtual currency without being required to  defer their losses under the wash sales rules. Taxpayers who hold virtual currency units at prices below  their tax basis might consider selling those units at a loss to harvest their losses, without regard to  whether they want to reestablish their positions. Those taxpayers who want to maintain substantially  identical positions after taking their losses for tax purposes can reacquire substantially identical units at the then market price at less than their basis in the units they disposed of. Such a sale and reacquisition  would allow such taxpayers to maintain their virtual current positions while reporting tax losses.  


Taxpayers should discuss their loss transactions with their tax advisors. Although most convertible  virtual currency positions are not likely to be subject to the wash sales rule, taxpayers should be aware  of possible application of the wash sales rule to certain transactions, as well as possible application of  the tax straddle rules and other statutory and judicial anti-abuse rules that could result in tax losses.


* This material is for general information purposes only and should not be construed as legal advice or any other advice on  any specific facts or circumstances. No one should act or refrain from acting based upon any information herein without  seeking professional legal advice. McDermott Will & Emery makes no warranties, representations, or claims of any kind  concerning the content herein. McDermott and Andrea S. Kramer expressly disclaim all liability to any person in respect of  the consequences of anything done or not done in reliance upon the use of contents included herein. For a complete list of  McDermott entities, visit  

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1 I.R.C. § 1091.  

2 Notice 2014-21, 2014-16 I.R.B. 938.  

3See SEC, Report of Investigation Pursuant to §21(a) of the Securities Exchange Act of 1934; The DAO, Securities Act  Release No. 81207 (July 25, 2017), at 3.