Are Bitcoin ETFs (IBIT, etc.) subject to wash sale rules? Tax implications explained

The wash sale rule (IRC Section 1091) specifically applies to securities, which includes stocks, bonds, and other investment instruments. Bitcoin and other cryptocurrencies are currently classified as property by the IRS (per Notice 2014-21), not securities, which is why they're not subject to wash sale rules. However, Bitcoin ETFs like IBIT are different - they ARE securities because they're exchange-traded funds registered under the Investment Company Act. So yes, Bitcoin ETFs would be subject to wash sale rules despite their underlying asset being exempt. This means you can't sell a Bitcoin ETF at a loss and repurchase it within 30 days before or after the sale without triggering the wash sale rule. As for the TBIL question, it gets complicated. Treasury bills themselves are exempt from state and local income taxes. However, when packaged as an ETF, the tax treatment depends on how the ETF is structured. Most ETFs distribute interest income that maintains the tax character of the underlying securities, so the interest portion from treasury bills should generally remain exempt from state taxes. But some of the fund's income might come from other sources that are taxable at the state level.

Just wanted to share that I've been using https://taxr.ai for sorting through these exact types of tax questions with my crypto investments. Last year I was totally confused about wash sales with my mix of direct crypto holdings and some crypto ETFs I bought through my brokerage account. I uploaded my trading history and tax docs to taxr.ai and it automatically flagged which transactions had wash sale implications and which didn't. It even explained the reasoning behind each determination, which helped me understand the difference between direct crypto holdings vs ETFs for tax purposes. It also flagged some state tax exemptions I was eligible for with certain treasury-backed investments. Their system seems to stay really up-to-date with the latest IRS guidance on crypto which is constantly evolving. Definitely saved me from making some costly mistakes.

Just want to follow up and say I tried out taxr.ai after seeing it mentioned here. It immediately cleared up my confusion about the Bitcoin ETF wash sale question. Turns out I had inadvertently created a wash sale situation with some BITO shares I sold at a loss and rebought two weeks later! The system not only identified the issue but actually showed me how to correctly report it on my taxes. It also properly separated my direct Bitcoin transactions (not subject to wash sale rules) from my ETF transactions (which are subject to them). What really impressed me was how it handled my question about the treasury ETFs and state taxes. It provided documentation showing that for my specific ETF (SGOV), about 92% of the distributions were from treasury interest that passes through as state-tax exempt. Never would have figured that out on my own!

Not directly related to the ETF question, but if you're trying to contact the IRS to get clarification on any of this crypto tax stuff, good luck. I spent DAYS trying to get through to someone who actually understood crypto taxation. After being on hold for hours and disconnected multiple times, I found https://claimyr.com which got me through to an IRS agent in about 20 minutes. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c I was super skeptical at first, but it actually connected me with a tax specialist who had specific knowledge about crypto ETFs and their treatment. The agent confirmed that Bitcoin ETFs are indeed subject to wash sale rules despite the underlying asset being exempt. They also pointed me to some helpful resources on IRS.gov specifically about ETFs that hold tax-exempt securities. Just sharing in case anyone else is banging their head against the wall trying to get official guidance on these newer investment vehicles.

Well I'm eating my words about Claimyr. After posting my skeptical comment, I decided to try it anyway since I was desperate to get clarity on how to report some of my Bitcoin ETF transactions from last year. It actually worked! Got through to an IRS tax specialist in about 35 minutes (they texted me updates while their system was holding). The agent confirmed everything that was said above - Bitcoin ETFs are definitely subject to wash sale rules unlike direct Bitcoin holdings. She also mentioned that there's actually a memorandum about this specific issue that was published internally at the IRS after the Bitcoin ETFs were approved. For my TBIL question, she explained that treasury-based ETFs distribute income that generally maintains the tax-exempt status for state taxes, but she recommended checking the specific ETF's tax documentation as the exact percentage can vary. Apparently each ETF has to provide a breakdown of tax-exempt vs taxable distributions. Definitely saving this service for next tax season!

One important nuance I haven't seen mentioned yet: While Bitcoin ETFs are subject to wash sale rules, this might actually be an advantage in some situations. If you're already holding these in a tax-advantaged account like an IRA, the wash sale rules are irrelevant since you're not reporting capital gains/losses annually anyway. Also, be careful about another quirk - if you sell Bitcoin at a loss and then purchase a Bitcoin ETF within 30 days, there's some debate whether this would trigger a wash sale since they're substantially similar investments despite having different classifications. The IRS hasn't provided specific guidance on this cross-vehicle scenario yet.

Has anyone actually received a 1099 from their brokerage that clearly shows the wash sale adjustments for these Bitcoin ETFs? I sold some BITO at a loss in February and bought IBIT a week later, and I'm not sure if my broker is going to flag that as a wash sale since they're different tickers but track the same underlying asset.

One more thing worth noting: there's legislation proposed in Congress (Digital Asset Tax Fairness Act) that would specifically address crypto taxation including potentially exempting Bitcoin ETFs from wash sale rules to match the treatment of direct Bitcoin holdings. No guarantee it passes, but this area is definitely evolving. For the TBIL question, I can confirm from my own state tax filing that the interest portion from treasury ETFs remains state-tax exempt. My accountant verified this and showed me where it's documented in my ETF's annual tax document packet. You have to look at the breakdown they provide of qualified vs non-qualified income sources.

This is a really comprehensive discussion! I wanted to add one practical consideration that might help others: if you're actively trading both direct Bitcoin and Bitcoin ETFs, consider keeping them in separate accounts or at least tracking them very carefully. I learned this the hard way when I had overlapping positions and got confused about which transactions were subject to wash sale rules and which weren't. Since direct Bitcoin trades can be tax-loss harvested immediately while ETF trades cannot, having a clear separation helps you optimize your tax strategy. Also, for anyone considering the Bitcoin ETF route, remember that while you lose some of the tax flexibility compared to direct ownership, you gain other benefits like being able to hold them in retirement accounts, no custody concerns, and easier estate planning. It really comes down to your specific situation and investment goals. One last tip: if you're using tax software to prepare your returns, make sure it's updated for the current year. Some of the older versions don't properly handle the nuances between crypto property treatment and ETF security treatment, which could lead to incorrect wash sale calculations.