I made a wash sale with crypto, can the economic substance doctrine be used against me?

Forum|Forum|3 years ago
March 12, 2023
2 replies
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Hey all, so I was interested in trying to minimize the amount of taxes I pay by using a tax loss harvesting method for crypto where I sell one of my investments and then buy it back in a very short period of time. There were many crypto tax websites recommending this so I thought why not. But after doing research it appears that there's something called the economic substance doctrine that basically states, if you do something specifically for tax purposes, it's not allowed and you can be fined.

How likely is it for me to get in trouble for this?

Not A Product Question

rjs

Employee

You're not going to get in trouble for tax loss harvesting.

The wash sale rule does not apply to crypto, at least for now.

lmosherAuthor

But considering it's still a transaction to where I'm selling it and buying back immediately, wouldn't that still fall under the doctrine as it looks like the transaction is purely for tax benefits?

fanfare

Employee

That's not tax loss harvesting. It's just speculating, scalping, day trading, active investing.

call it what you want. Not illegal.

lmosherAuthor

How wouldn't it fall under the doctrine though? Selling and then buying back immediately wouldn't raise any red flags?

rjs

Employee

No, it won't raise any red flags. People do it all the time. You missed, or misinterpreted, the "exception for personal transactions of individuals" in IRC Section 7701(o)(5)(B). For an individual, the economic substance doctrine only applies to "transactions entered into in connection with a trade or business."

Don't worry about it.