Lawmakers renew push to axe a lucrative tax loophole for crypto investors

Some Congressional lawmakers are pushing to get rid of a lucrative tax loophole for cryptocurrency investors estimated to be worth billions of dollars per year. It's a potentially rare area of bipartisan agreement when it comes to tax and crypto issues, experts said. The tax code allows investors in digital assets like bitcoin and ether to claim a tax benefit for an investment loss, just they do for stocks and other traditional assets. However, unlike stocks, crypto isn't subject to so-called wash sale rules. In practice, that means crypto investors can essentially claim the tax break associated with an investment loss without divesting the holding from their portfolio. The tax advantage has "been widely used" by crypto investors, said Troy Lewis, a certified public accountant and professor of accounting and tax at Brigham Young University. "There's this big hole, and people are going to drive a truck through it," Lewis said. What is the wash sale rule? Investors who sell investments for a loss in a given year — known as a capital loss — can generally use those losses to offset their capital gains. This way, investors reduce the capital gains taxes they may owe on their winning investments. Should losses exceed profits, they can deduct up to $3,000 from their regular income, and carry any remaining losses to future years. The move, known as tax-loss harvesting, is a common strategy that financial planners and accountants use with their clients. However, for decades, federal tax rules — "wash sale" rules — have prevented investors from abusing the tax break. The rules prevent investors who sell a stock or security for a loss from buying back the same or "substantially" similar security within 30 days before or 30 days after a sale and still claim a tax deduction for the capital loss. Wash sale rules don't prevent investors from transacting this way — just from claiming the tax break associated with that churn. Without such rules, investors could sell a stock that has fallen in value and immediately buy it back — reaping the benefit of a tax break essentially without changing their investment portfolio at all, experts said. 'Momentum' around crypto tax legislation Rep. Jodey Arrington, R-Texas, introduced legislation in June — the Applying Existing Tax Anti-Abuse Rules to Digital Assets Act — that would eliminate the loophole by subjecting crypto transactions to wash sale rules. The Biden administration and congressional Democrats had tried to do the same during the pandemic era. The Treasury Department in 2024 estimated that applying the wash sale rules to digital assets would raise nearly $24 billion over a decade. It is "significant" to now have this legislation being introduced by a Republican, said Colin Wilhelm, manager of tax legislative affairs at Grant Thornton, an accounting and tax advisory firm. "I think you do see some momentum around tax legislation in this area," Wilhelm said. The concept seems to have buy-in from other Republicans, too. "Extending these [wash sale] rules to digital assets ensure they are not treated better or worse than similar financial assets and provides consistency and clarity for investors and traders," Rep. Ron Estes, R-Kansas, said in June at a House Ways and Means Committee hearing. That hearing focused on six recent bills to reform taxation of digital assets like cryptocurrencies, Wilhelm wrote in a legislative analysis. "This new wave of bills includes buy-in from the chair and Republican majority of the Ways and Means Committee, the first time the leadership of a taxwriting committee has put forward its own cryptocurrency proposals," he wrote. It's unlikely the package of House crypto legislation — including the wash sale bill — would pass in the coming months as Congress approaches the midterm elections, but at the very least, it signals stronger interest in such provisions in the future, experts said. The tax efforts come as the Senate debates a separate and broad crypto regulation measure — the Clarity Act — that would, among other things, ban federal officials from issuing digital assets. Why crypto isn't subject to wash sale rules Wash sale rules have been on the books in some form since 1921. Crypto doesn't fall within the purview of existing wash sale rules because the federal government generally treats crypto as property — not as a security, Lewis said. Lawmakers created the rules at a time when digital assets were nearly a century away from being part of the financial mainstream — and, as such, the rules as written don't neatly capture crypto, he said. Extending wash sale rules to crypto would also be a "budget-raiser" for lawmakers, Lewis said. "And those things today are difficult to find, because usually there's some political heat on one side or the other," he said. Additionally, the legislative push comes as many investors who bought crypto over the past one to two years are likely sitting on investment losses — and are therefore more likely to benefit from the wash sale exemption, experts said. Bitcoin, the largest cryptocurrency, has lost about half its value since October 2025. "The reason why it's coming up now is because of the year-over-year decline," Lewis said. It wouldn't matter as much "if everything is puppy dogs, rainbows, apple pie and baseball," he said. Some crypto investors do face wash sale rules Not all crypto investors can take advantage of the current loophole. Since the existing wash sale rules apply to securities, investors who hold funds like bitcoin exchange-traded funds and other crypto ETFs — which are securities — likely do need to comply, Lewis said. Holding crypto directly — not in an investment fund — is what generally qualifies as property, he said. Being subject to the wash sale rules may not be as restrictive as crypto investors might expect. For example, investors could arguably sell a position in bitcoin at a loss and immediately buy back a position in ether without running afoul of the rules, Lewis said. While both are cryptocurrencies, their properties may be different enough that investors could argue that they're not "substantially" similar, he said. It's a similar concept relative to stocks: For example, investors could arguably sell common stock in Apple at a loss and immediately buy preferred shares in Apple without triggering wash sale rules, either, since the securities have different characteristics, Lewis said.