I would want my towel bar to be in the wainscot tile area otherwise dampness of towel would be touching the wall and then the towel would be sticking out as it drapes over the crown.

I think it would look fine to have the crown run into the sides of the cabinet. I've included a drawing showing where I have my wainscot run into my window frame.
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I've seen plenty of examples with the medicine cabinets inset into wainscoting. It all comes down to personal preference.

How tall are your ceilings? Wainscot usually looks best 6-12" above the halfway point so that the room is not visually cut in half.

I set things into wainscot all the time. No worries if you go that route.

If you can't properly deconflict the wainscot cap with the door swing, you could pad the medicine cabinet out a bit. But that detail, it's on a case-by-case basis.

We wrapped a framed mirror into wainscot. I am sure you could do something similar with your medicine cabinets.

Our bathroom is not finished, but here is a pic.

This post was edited by sparklebread on Thu, Nov 14, 13 at 21:36

Thanks for the responses.

Allison - Interesting observation about the height. My ceilings upstairs are low (dormered cape - 88") so 40" would be less than half the height. Either way, it's a small bathroom so I think there's not enough wall to create that split in half look.

Enduring - The chair rail I'm considering would only come out about an inch, so I don't think the towels would touch the wall except while actually hanging them, nor would they drape out. If anything, the chair rail will hold the towels off the wall for those top few inches. But I'll definitely take the depth of the bars into consideration when choosing.

Mongoct - Good idea with bumping out if needed. I suppose another option would be a surface mounted cabinet, but I'm trying to avoid that.

Thanks again.