This post was authored by Salvatore M. Capizzi, CEPA, CBDA, Dunham's Chief Sales & Marketing Officer. If you have questions concerning today's topic, please call us at (858) 964-0500. Hold us to higher standards.

Key Takeaways

  • Cryptocurrency is not currently subject to the IRS wash sale rule, creating a unique tax-loss harvesting opportunity.
  • Crypto losses can offset capital gains from stocks and other investments, even if the crypto is immediately repurchased.
  • Directly held crypto qualifies; crypto ETFs do not, as ETFs are treated as securities.
  • This strategy may not last forever, as legislation could extend wash sale rules to digital assets.

'Tis the season for eggnog and tax loss harvesting!

But this year, advisors face an unusual problem.

The strong stock market performance over the last 16 years - especially in 2023, 2024, and 2025 - has made traditional tax-loss harvesting a challenge. When nearly everything in the portfolio shows green, the harvest may come up empty.

However, recent weeks have presented an unexpected opportunity. Bitcoin and other cryptocurrencies have experienced significant declines, with Bitcoin falling from its October peak of $126,198 to just over $90,000 on November 26, 2025. (1)

And because cryptocurrency is not subject to the IRS wash sale rule, clients can realize losses and immediately repurchase the same crypto position - a tax planning benefit unavailable in traditional securities.

For clients who own Bitcoin or other digital assets, this market correction may present a valuable tax planning opportunity that is not available in traditional securities.

Crypto Wash Sale Rule: Why It Doesn’t Apply

Here is how you can add true value to clients who may own cryptocurrency.

The IRS currently treats cryptocurrency as property rather than a security. Because the wash sale rule applies specifically to securities and stocks, it does not apply to cryptocurrency transactions. (2)

This could create an attractive planning opportunity.

Your clients who own Bitcoin, Ethereum, or other cryptocurrencies can:

  • Sell the asset at a loss
  • Immediately repurchase the same crypto (no 30-day wash sale restriction)
  • Still claim the full tax loss under current IRS rules
  • Use the loss to offset capital gains from other investments
  • Reduce up to $3,000 of ordinary income per year
  • Carry forward unused losses indefinitely

As a hypothetical example, let us say a client purchased Bitcoin earlier this year at $120,000 per coin. With Bitcoin now trading around $90,000, they have an unrealized loss of $30,000.

They can sell that Bitcoin today, realize the $30,000 loss for tax purposes, and repurchase the same Bitcoin at approximately the same price. The entire $30,000 loss remains available to offset other gains or income on their tax return. Their position in Bitcoin remains essentially unchanged, but they have reaped a real tax benefit.

This is the advantage of crypto wash sales.

Which Crypto Assets Qualify for Tax Loss Harvesting and Which Do Not

The absence of wash sale restrictions applies broadly across the cryptocurrency universe. Here is how it works for different types of digital assets: (3)

Direct Cryptocurrency Holdings
Bitcoin, Ethereum, and other cryptocurrencies held directly in wallets or on exchanges all qualify. Whether your client holds Bitcoin on Coinbase, Ethereum in a hardware wallet, or any of the thousands of other tokens, the same treatment applies. These are all currently considered property by the IRS.

DeFi and DAO Tokens
Decentralized finance (DeFi) tokens and governance tokens from Decentralized Autonomous Organizations (DAOs) also fall under this property classification. If your client has losses in protocols like Uniswap, Aave, or other DeFi platforms, those losses can be harvested without any current wash sale restrictions.

NFTs
Non-fungible tokens (NFT) represent another category of digital property. While the market for NFTs has been particularly volatile, losses in these assets can currently be realized and claimed without triggering wash sale rules.

Blockchain and Cryptocurrency ETFs
Bitcoin and Ethereum exchange-traded funds that trade on traditional stock exchanges are subject to the wash sale rule. These ETFs are structured as securities that trade like stocks, even though they hold cryptocurrency as their underlying asset. These ETFs are securities, and the wash sale rule applies.

While this strategy is currently permitted under existing tax law, the regulatory environment surrounding cryptocurrency taxation is evolving rapidly. Several factors require careful consideration before implementing this approach with clients.(3)

Legislative Proposals Are Ongoing
Multiple bills introduced in Congress since 2021 have sought to apply the wash sale rule to digital assets. I consider this a clear regulatory intent to close what lawmakers view as a tax loophole.

The Direction Is Clear
Tax policy experts and industry observers widely expect that wash sale rules will eventually apply to cryptocurrencies. The question is not if, but when.

Retroactive Application Risk
While most tax professionals believe that any new legislation would apply prospectively rather than retroactively, there is no guarantee. In rare circumstances, Congress has applied tax law changes retroactively. Clients should understand that, while unlikely, there exists a theoretical risk that future legislation could invalidate previously claimed losses.

Economic Substance Doctrine
A broader tax principle exists, known as the economic substance doctrine, which requires that transactions have a genuine economic purpose beyond mere tax avoidance. While selling and immediately repurchasing cryptocurrency does not currently violate wash sale rules, transactions that appear to have no purpose other than generating tax losses could be challenged on other grounds.

The Important Role of Tax Professionals

Given the complexity and evolving nature of cryptocurrency taxation, clients must consult with qualified tax professionals before implementing any tax loss harvesting strategy. This is not an area for do-it-yourself approaches without expert guidance.

Different clients have different risk tolerances regarding tax strategies. Conservative clients may prefer to avoid the strategy altogether due to regulatory uncertainty. More aggressive clients may wish to maximize current benefits. A tax advisor can help balance the approach to match client preferences and risk profile.

Also, state tax treatment varies significantly. Some states follow federal rules, while others have specific provisions for digital assets. Multi-state issues add another layer of complexity, requiring professional tax analysis.

Tools to Help Track Crypto Transactions


One of the biggest challenges in cryptocurrency tax reporting is tracking transactions across multiple wallets, exchanges, and platforms. Fortunately, several professional-grade software solutions have emerged to help advisors and their clients manage this burden.

These platforms are among the most commonly used tools, however, advisors and their clients should conduct their own due diligence.

  • CoinLedger
  • CoinTracker
  • Koinly
  • ZenLedger
  • TokenTax

These platforms typically work by connecting exchange accounts via API keys or importing CSV files containing transaction history. They automatically calculate cost basis, track holding periods, identify wash sales in traditional securities, and generate comprehensive tax reports. Many integrate seamlessly with popular tax preparation software, making it easier for both clients filing on their own and professionals preparing returns.

Closing thoughts

The combination of a strong stock market and a declining cryptocurrency market can create a unique planning opportunity in 2025.

When traditional portfolios are showing gains but clients' digital assets are in the red, strategic crypto tax loss harvesting can offset those capital gains without triggering wash sale restrictions.

This becomes especially valuable as year-end approaches. December is traditionally when advisors look to harvest losses, yet this year offers fewer opportunities in equities.

With cryptocurrencies, there is no need to orchestrate timing around 30-day windows or find substitute securities. The ability to sell and immediately repurchase could make this a straight forward tax strategy to execute and explain to clients.

By understanding today’s digital-asset tax rules, working with qualified tax professionals, and using tracking software, advisors can help clients turn market declines into what could be a tax advantage while maintaining their investment positions.

This type of guidance could show both technical knowledge and strategic thinking, delivered with the appropriate level of professional caution.

Sources:

Disclosures:

This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation, or as a substitute for legal or tax counsel. Any investment products or services named herein are for illustrative purposes only and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance. All examples are hypothetical and are for illustrative purposes only.

Federal and state laws and regulations are complex and subject to change, which can materially impact your results.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Information contained in the materials included is believed to be from reliable sources, but no representations or guarantees are made as to the accuracy or completeness of information. This document is provided for information purposes only and should not be considered as investment advice.

Dunham & Associates Investment Counsel, Inc. is a Registered Investment Adviser and Broker/Dealer. Member FINRA/SIPC. Advisory services and securities offered through Dunham & Associates Investment Counsel, Inc.

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