Should I sell my Tokens and realize a loss before year end?

Disclaimer 
 
I have now been asked almost a dozen times about the "Wash Sale Rules" and whether token holders should sell and repurchase tokens before year end.

The Wash Sale rules (IRC Section 1091) provide that if you sell a security at a loss and repurchase a substantially identical security within 30 days, your loss will be disallowed (and added to your tax basis in the purchased security).

People have been hearing that the Wash Sale rule doesn't apply to tokens because the IRS has not designated tokens as securities.  (Remember that the characterization of tokens as securities by the SEC or as something else by the CFTC is not relevant for tax law purposes.  Tokens may be securities for some purposes and not for others.)

If that's true, you could sell your BTC today and buy back BTC an hour later and trigger a loss that you can use to offset capital gain (or up to $3,000 of ordinary income) from some other source.

That's a very reasonable argument, but I want to highlight some issues you may want to consider:

• The IRS almost certainly thinks that everyone using crypto is at the very least trying to cheat the tax man and at worst is a criminal -- and the fact that an argument is "reasonable" may not be persuasive.  If the IRS decides that it wants to impose the Wash Sale rules, all it has to do is declare tokens are securities, and given that its prior announcements didn't exclude that possibility, that declaration could be retroactive.
• That's not all bad, at worst, you just paid transaction costs for the sale and repurchase which should be low -- so maybe it's worth the risk.
• If you are going to do a Wash Sale, you must believe there is a significant chance that BTC (or whatever) will appreciate in the next 30 days.  If that's not true, then wait the 30 days to repurchase and avoid the issue altogether.
• Even if you are concerned about this risk, you could sell BTC and buy ETH and be hedged against a broad market move (although you would be at risk if BTC appreciated relatively more than ETH).  That way, again, you avoid the issue altogether.
• If you decide that you actually want to sell BTC and buy it right back, be sure that your sales are true sales.  Don't buy and sell from the same person.  If you can find two different networks where the sale will clear in one hour in one, but the purchase will not clear for a day in the other, that's better.  Similarly, a sale on December 31 and a purchase on January 1 will have better visuals than a sale and a purchase on the same day or even in the same year.

One more point.  There are at least two other significant consequences (one bad, one good) to treating tokens as securities that might impact the IRS's decision (and whether you want to make the argument at all).

• First, if tokens are securities, and they are "marketable securities", then generally fund investors may need to pay tax on any unrealized gain when those tokens are distributed (there are exceptions where the fund purchased the tokens before network launch and where the fund qualifies as an "Investment Partnership").  This is just an acceleration of tax, not an additional tax, but it's still an unfortunate result.
• Second (and more interesting to me) is that if tokens are securities, you can engage in "securities lending" transactions.  So rather than using your highly appreciated BTC to buy your boat (and paying tax on that appreciation), you might borrow ETH, secure it by your BTC and then buy your boat with ETH.  I expect that if token lending transactions become accepted by the IRS, that will be a primary way transactions are carried out.  (I have heard some lawyers at large nationally recognized firms say that tokens don't need to be securities for these rules to apply, but I'm skeptical). 

So in sum, if you have significant 2018 capital gains, you have significant unrealized losses in tokens you own and you think that the token economy might recover in the next 30 days, go ahead and make the sale and repurchase.  There is a good argument that you'll benefit from the loss and the downside of an adverse result should not be significant.  BUT, if you can wait the 30 days or if you can buy a different currency, you should do that to reduce the risk -- and that will allow you to argue in the future that the IRS should treat tokens as securities so that you may engage in securities lending transactions.




                                                                                            JBD