Crypto wash sale rule push returns as lawmakers target tax break

Lawmakers are taking another run at a crypto wash sale rule, a change that could reduce a tax break available to people who trade bitcoin, ether and other digital assets directly. For retail investors, the issue matters because crypto’s tax treatment can affect how much of a market loss can be used to cut a tax bill.

Under current federal tax rules, investors can generally use capital losses, meaning losses from selling investments, to offset capital gains from profitable trades, according to the IRS. If losses are larger than gains, investors can deduct up to $3,000 against ordinary income and carry remaining losses into later years.

Stocks, bonds and many other traditional assets face wash sale restrictions. Crypto held directly generally does not, because the federal government treats digital assets as property rather than securities, according to Troy Lewis, a certified public accountant and accounting and tax professor at Brigham Young University.

What is the crypto wash sale loophole?

A wash sale rule blocks an investor from selling a security at a loss, buying the same or a substantially similar security within 30 days before or after the sale, and still using that loss for a tax deduction. Crypto’s exemption means a direct holder may sell a digital asset at a loss, quickly repurchase it and still claim the tax loss, according to Lewis.

Lewis said the strategy has been widely used by crypto investors. He described the current gap in the rules as “this big hole,” adding that investors are likely to use it when available.

Rep. Jodey Arrington, a Texas Republican, introduced the Applying Existing Tax Anti-Abuse Rules to Digital Assets Act in June. The bill would bring digital asset transactions under the same wash sale framework that already applies to securities.

The idea has surfaced before. The Biden administration and congressional Democrats pushed a similar change during the pandemic era. The Treasury Department estimated in 2024 that applying wash sale rules to digital assets would raise nearly $24 billion over 10 years.

Why are lawmakers looking at this now?

The renewed tax push comes after a sharp pullback in crypto prices. Bitcoin, the largest cryptocurrency, has lost about half its value since October 2025, according to CNBC market data cited in the report. Losses make tax-loss harvesting more relevant because more investors may have positions they can sell below their purchase price.

Colin Wilhelm, manager of tax legislative affairs at Grant Thornton, said a Republican introducing this kind of bill is significant and shows “momentum” around crypto tax legislation. In a Grant Thornton analysis, Wilhelm wrote that recent House proposals include support from the chair and Republican majority of the Ways and Means Committee, marking the first time leadership of a tax-writing committee has put forward its own cryptocurrency tax proposals.

Rep. Ron Estes, a Kansas Republican, also backed extending wash sale rules to digital assets at a House Ways and Means Committee hearing in June. Estes said the change would help ensure digital assets are not treated better or worse than similar financial assets and would give investors and traders more consistency.

Experts cited in the report said the House crypto tax package, including the wash sale bill, is unlikely to pass in the coming months as Congress heads toward midterm elections. Still, they said the proposals point to stronger interest in revisiting crypto tax rules.

Which crypto investors already face wash sale limits?

Lewis said the current opening generally applies to people who hold crypto directly. Investors who own bitcoin exchange-traded funds or other crypto ETFs likely already fall under wash sale rules because those funds are securities.

Even if Congress extends the rule, Lewis said it may leave room for trades between assets that are not substantially similar. For example, he said an investor could argue that selling bitcoin at a loss and buying ether is different from immediately repurchasing bitcoin, because the assets have different characteristics.

This story draws on original reporting from CNBC.