Let’s start with a definition. To fully comprehend the term, you should first have a thorough understanding of financial asset custody. Custodians are the entities that provide a variety of financial services in conventional financial markets. The primary job of custodial service providers within conventional capital markets is asset safekeeping.

Custodians may function as vaults, storing clients’ assets in both digital and physical forms and charging a fee for this service. Furthermore, custodians use their market knowledge to facilitate and expedite the settlement of client trades. But what does crypto custody mean? In the context of cryptocurrency, it is almost the same, as there are commonalities with conventional financial industry custodians. Still, there are a few specifics to cryptocurrency custody that you need to be aware of.

What Is a Cryptocurrency Custodian?
-----------------------------------

Institutional cryptocurrency custodial solutions are similar to those of conventional capital markets custodians, but with one significant difference; custody solutions for cryptocurrency are primarily concerned with taking responsibility for and protecting clients’ digital currencies, not physical assets. Secure key management is fundamental to the successful storage and processing of crypto data when it comes to storage solutions.

How Does Crypto Custody Work? Public Keys and Private Keys
----------------------------------------------------------

If we delve deeply into any cryptocurrency wallet, we will discover how the keys are used. In reality, any solution that provides you with custody of cryptocurrency, such as a crypto wallet, does not actually keep your coins.

The private keys are held for you by the cryptocurrency custody provider of your choice. Custody solutions may also assist you in properly managing your cryptocurrency by providing private key access. Private keys are random binary numbers that aid in transaction encryption and decryption. The private keys are used to validate a transaction.

Public keys are essentially long numeric strings that are linked to a certain wallet or custodial solution. They act as the user’s wallet address and should be linked with the appropriate private key when the user executes transactions, such as buy/sell, transfer, convert, or swap.

Cryptocurrency Custody Options: What Is a Crypto Custodial Wallet?
------------------------------------------------------------------

With a thorough understanding of the fundamentals of cryptocurrency custody, it is now time to focus on various categories of solutions. What sorts of custody solutions are available for cryptocurrency? Below are the three most frequent forms of crypto custody services available to both individuals and institutions. A crypto custodial wallet is a sort of cryptocurrency wallet in which the private keys of the wallet are stored by a third-party service provider called a custodian.

1.  ### Self-Custody Wallets
    

Self-custody cryptocurrency solutions mean you keep the private keys to the crypto assets yourself, using hardware, software, or paper. Self-custody wallets are some of the most popular alternatives for individual cryptocurrency custodial solutions. You safeguard your crypto assets using the hardware, software, or paper wallets that suit your needs. 

The benefits of self-custody systems include increased security and control over your assets. However, you must take full responsibility for your asset, as well as the risks of theft and loss.

2.  ### Exchange Wallets
    

Another popular approach for cryptocurrency custody involves using wallets on an exchange, such as [Exolix](https://exolix.com/). An exchange wallet is a means by which investors and traders make it easier for themselves to exchange, administer and store private and public keys. Users have simple access to their public and private keys through an electronic wallet.

These systems are appropriate for institutional cryptocurrency custody, in which the exchange is responsible for using private keys. Although exchange wallets provide significant simplicity and convenience of access for maintaining cryptocurrency custody, they also pose some risks to counterparties.

3.  ### Third-Party Custodial Wallets
    

Third-party custodians are another solution for cryptocurrency custody providers. Third-party custodians are service companies that store crypto assets for their clients. Third-party custodians provide the option of implementing custom-defined functions and controls for governing asset management.

Third-party custody solutions provide superior institutional-grade security as well as insurance for enterprise crypto custody. Standardized schemes with strictly delineated rules and procedures for handling crypto assets do provide a potential benefit. Furthermore, third-party custodians provide greater flexibility and security but at a higher cost.

Is Cryptocurrency Custody Safe?
-------------------------------

Cryptocurrency custody is not 100% safe, as there always is a risk of hacking or data leakage, but it may be considered “sufficiently safe” because all necessary precautions are taken.

Whenever you use cryptocurrency custody, you are entrusting your money to a system designed and managed by someone else. Because these individuals can make errors or be outwitted by an attacker, any system can only be as safe and secure as the people who create and maintain it.

Having mentioned this, numerous crypto custody systems are created and managed by industry specialists who are fully familiar with the technical and physical issues associated with protecting assets. To eliminate any uncertainty, several custodians offer insurance plans for your assets if particular concerns exist.

Types of Cryptocurrency Wallets
-------------------------------

*   A wallet constantly linked to the Web is referred to as “hot storage.” Exchanges, for instance, always offer hot wallets that let users withdraw cash promptly.
    
*   Warm storage refers to a wallet that is located on a network interface but still functions without it.
    
*   A cold storage wallet is a device that is not linked to the internet. Transfers are usually undertaken in an “air-gapped” manner, in which transaction authorization occurs on a distinct, offline server rather than on the internet-connected host.
    

Additional Security Precautions
-------------------------------

Two-factor Authentication (2FA) is a method of ensuring that accounts are secured by more than just a password and require a random number or a device to enable access.

Businesses frequently employ address whitelisting to guarantee that cash is only sent to previously approved addresses. This necessitates a hacker having access both to the wallet and the system that keeps this list.

A multi-signature (multi-sig) wallet requires permission via several keys to have access to money and transmit transactions.

To guard against physical assaults, these keys and/or users should be distributed geographically.

The private keys required to begin transactions are better kept cold. The phrase “cold storage” applies to offline storage that prevents transactions from being performed remotely via the internet.

Whenever someone attempts to move funds into a crypto vault, there is a built-in, predefined delay. This is sometimes referred to as a “timelock.” It prevents the cryptocurrency from being transferred for a set period.

Individuals may employ these security features without the assistance of a custody provider, but like with many things in the world, having a professional handle them can be beneficial.

Furthermore, many cryptocurrency custody providers are audited regularly and will pay consultants to try to breach their networks to find and address such weaknesses preemptively.

The Expense of Cryptocurrency Custody
-------------------------------------

Cryptocurrency custody companies charge for the safeguarding of cryptocurrency in the same manner that banks do for specific checking accounts.

Self-custody users do not pay a fee, but they do spend money on wallets and storage that ensure the private keys are secure.

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Custodians are the entities that provide a variety of financial services in conventional financial markets. The primary job of custodial service providers within conventional capital markets is asset safekeeping.

What Is Cryptocurrency Custody and How Does It Work? | Exolix

What Is Cryptocurrency Custody and How Does It Work?

What’s a Seed Phrase?
---------------------

A seed phrase, also called a backup or recovery phrase, is a word sequence that is used to restore or regain access to a cryptocurrency wallet. Such phrases are generally between 12 and 24 words long and are created by a cryptographically safe generator of random numbers. Here, we’ll look more closely at seed phrases, why they’re essential, and how to use them correctly, and then discuss how hard it is to guess a seed phrase.

Why Is the Seed Phrase Significant?
-----------------------------------

*   A seed phrase is required to access your cryptocurrency wallet. Without it, you wouldn’t be able to access your funds.
    
*   Seed phrases serve as a backup, allowing you to regain access to the cryptocurrency even if you forget your passwords.
    
*   Seed phrases are additionally used to access your wallet on a new device or to restore cryptocurrency assets if you lose your smartphone or have it stolen.
    

Seed phrases are an important part of safeguarding your cryptocurrency wallet to make sure it remains secure after you buy, sell, convert, swap, stake, or perform any other transactions with your cryptocurrency. It is critical to generate and store the seed phrase safely.

*   While seed phrases are essential, simply creating and storing them is insufficient. It’s also crucial to check your seed phrase regularly to make sure that it remains safe and secure. Remember that the safety of your seed phrase can only be as good as the safety of the place it’s kept.
    

A further major consideration is to avoid using the same seed phrase for several cryptocurrency wallets or accounts. In case one wallet or account is hacked, each must have its own seed phrase. This will keep the other wallets or accounts secure as well.

Can Someone Guess My Seed Phrase?
---------------------------------

To answer the question, “how hard is it to guess a seed phrase?” we need to look at some basic propositions of probability theory. The longer the encryption and the more characters it contains, the lower the risk of hacking. The complexity of a phrase is determined by its length as well as the technology used to obtain it. A seed phrase consisting of 12 words created by a random word generator would be almost impossible to guess, given that there are more than 132 quadrillion potential word combinations.

They’re nearly as strong as cryptocurrency private keys, so your chances of guessing a seed phrase are comparable to those of guessing the private key of a cryptocurrency wallet. In this scenario, however, the seed phrase is smaller and less sophisticated. If the technique applied to generate it isn’t genuinely random, the seed phrase is regarded as easier to predict. To guarantee the security of your cryptocurrency assets, it is critical to have a long and complicated seed phrase created using a secure technique.

Although guessing seed phrases is almost impossible, it is still critical to be careful of seed phrase fraud, which is becoming more prevalent. Somebody might try to deceive you into providing them with the seed phrase. Scammers may apply social engineering techniques such as impersonating a client service employee from a reputable wallet provider or by providing a “recovery service” for missing seed phrases. Don’t ever provide your seed phrase to anybody, even if they appear to come from a trustworthy firm.

How to Safeguard a Seed Phrase
------------------------------

*   Create your seed phrase with trusted wallet software;
    
*   Use a piece of paper and a pen to write down the phrase and save it somewhere secure. It is critical to keep the phrase private and secure, as anybody who has access to it can access your money;
    
*   Make reserve copies of the phrase and keep them in separate locations in case one is lost or destroyed;
    
*   Do not save the seed phrase to a computer or smartphone since it might be hacked;
    
*   Avoid taking a picture or snapshot of the seed phrase because these can be stolen easily;
    
*   Store your seed in a secure location, for example, in a safe deposit box or a secure area of your house;
    
*   Do not reveal your seed phrase to anybody, including family members or friends, and do not save it in a cloud storage service, which may be hacked and accessed;
    
*   Apply encryption to the seed phrase by using a password manager, such as LastPass or 1Password.
    

Another factor to consider when using seed words is the risk of human error. Even if you take all the required precautions to safeguard the seed phrase, there is still the possibility that you may misplace it or forget where you placed it. This is why it’s critical to have a backup strategy in case your seed word is lost or stolen.

1.  You may use a service to protect the seed phrase securely. To keep a phrase secure, these services often employ cutting-edge security features such as encryption and multi-factor authentication. Choose only reliable and trustworthy seed phrase-storing providers.
    
2.  A hardware wallet is another possibility. These are physical devices that store your seed phrase offline on a secure chip. They are considered one of the most secure ways of storing the seed phrase. For example, some wallets employ BIP39 seed phrases, which adhere to a certain standard. Other wallets may use a different type of phrase. It is vital to understand the distinctions between several seed phrases and to choose the one advised by your wallet provider.
    

Takeaway
--------

Seed phrases are a critical component of safeguarding your cryptocurrency assets. You may secure your seed phrase and your funds by adhering to the best procedures for creating and storing them. Furthermore, having a backup plan on hand is a great way to go. 

Using a hardware wallet and understanding the types of seed phrases available can add an extra layer of protection. It’s crucial to note that the seed phrase “safety” is only as strong as the security measures you implement, so take the appropriate precautions to safeguard your assets and have peace of mind knowing that your funds are secure.

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Seed phrases are a critical component of safeguarding your cryptocurrency assets. You may secure your seed phrase and your funds by adhering to the best procedures for creating and storing them.

How Hard Is It to Guess a Seed Phrase?

Even though the blockchain world is slowly but surely reaching the mainstream, there are still many misconceptions, often persistent ones. For example, many people seem to believe that all cryptos are anonymous. The truth is that they are, for the most part, quasi-anonymous: your wallet address won’t expose any sensitive data, but it can be used to identify you. When your identity is linked to your crypto activity, third parties can become aware of your transactions and assets.

However, there exist cryptocurrencies that are fully private, which means there’s little to no risk of your blockchain activity being known by others. Before we list the best private cryptocurrencies to buy, it is important to understand the basics of what they are and how they work.

Understanding Private Cryptocurrencies
--------------------------------------

A private crypto is a currency that utilizes cryptography to safeguard transactions and govern the issuance of new private cryptocurrency units. It is worth repeating that all cryptocurrencies operate on the complete decentralization principle, which means they are not controlled by a state or any financial authorities or institutions.

Unlike BTC or other pseudo-anonymous cryptos, private altcoins do offer heightened security and, more or less, full anonymity to their users. Instead of being recorded on a public ledger, private crypto transactions are kept undisclosed.

The most important mechanism for keeping these coins up to date is the prudent use of cryptography. Cryptography is similar to encryption, whereby you convert something that is readable into something that is unreadable. Here are the two main ways that private coins harness the power of cryptography:

1.  Encrypting the transactions. Only the persons directly involved in the transaction can see the encrypted data. Encryption efficiently prevents outside parties from reading the transaction.
    
2.  Governing the creation of new units. Mining is controlled, and that helps keep private cryptocurrencies just that.
    

The Best Private Cryptocurrency for Purchase: Top Picks
-------------------------------------------------------

Even though you’re used to the Exolix Blog coming up with daring top picks, that’s not what we’re doing this time. Our number one pick is Monero (XMR). Not only is it one of the best-represented and talked-about private coins, but it is also one that implements a number of efficient and sophisticated features that add value to its users, such as something called ring signatures. Many businesses accept XMR as payment since it is fungible. The large exchange sites put XMR front and center as one of the most popular coins. Here’s a list of the main advantages of XMR:

*   Monero is proven to be safe and anonymous.
    
*   It’s impossible to trace transactions back to you.
    
*   It offers block and scalability limits.
    
*   The XMR team is always trying to improve their project.
    
*   Monero has selective transparency: XMR is auditable.
    

The number two pick is not going to surprise you either: it’s Dash. This altcoin utilizes a robust technique known as PrivateSend to make sure that all transactions are private. Here are the biggest pros of Dash:

*   InstantSend. You can send your Dash coins with no network confirmation.
    
*   The Dash team is very dedicated and forward-thinking.
    
*   Dash reaches consensus much more easily than most of its competitors.
    
*   Scalability is simple when using Dash.
    

Dark Horse Picks – Most Promising Private Cryptos to Buy
--------------------------------------------------------

1.  Zcash (ZEC). Even when we aren’t talking about private coins, ZEC is very likely to make any list of the best cryptocurrency to buy for profit. It’s a very dynamic cryptocurrency that offers its users many opportunities to improve their experience. For instance, ZEC allows users to swap privacy settings on different levels. It also has mainstream credibility – in 2018, it brokered a deal with Microsoft. The ZEC team helped expand and boost the security functions of the Azure cloud platform.
    
2.  As a Dash fork, PIVX boasts many of the same features that made Dash one of the top picks. The key difference lies in the fact that PIVX is proof-of-stake crypto, which means that investors can make money by staking their funds. Instead of Dash’s master node system, PIVX uses community-driven governance. This governance model is what makes PIVX one of the best crypto projects currently running.
    

Along with most private coins, NavCoin (NAV) allows its users to enjoy heightened security and anonymity. The biggest selling point is their patented NaVTech, a technique that enables users to carry out transactions with no need for a central server. Furthermore, NAV is among the very few private coins that offer both proof of work and proof of stake. One of the features that really send NAV over the edge for us is its community fund. The fund made many great things possible: small ideas and impossible dreams came true; for example, NAV became the first carbon-neutral cryptocurrency in the world.

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What is the best private cryptocurrency to invest in 2023, without loss of investment? Read in our blog

Best Private Cryptocurrencies to Buy in 2023 | Exolix

A private crypto is a currency that utilizes cryptography to safeguard transactions and govern the issuance of new private cryptocurrency units.

Best Private Cryptocurrencies to Buy in 2023

In the crypto community, the term SegWit (or BTC SegWit or Segregated Witness) is used to refer to an alteration in the transaction format of Bitcoin. The need for SegWit creation was caused by certain limitations of BTC. The new protocol decreases the amount of time it takes to process transactions, so every time you swap and exchange crypto, your transactions are performed much more quickly. The increased capacity of the blocks within the blockchain also has a positive impact on a well-known blockchain issue known as [transaction malleability](https://github.com/bitcoin/bips/blob/master/bip-0141.mediawiki#user-content-Motivation).

When looking at the main differences between BTC and BTC SegWit, people need to put their minds to it and understand what each of them stands for. Understanding BTC SegWit is pivotal, as it can help crypto newbies start using cryptocurrency the right way and avoid any unwanted problems that could be related to the inherent shortcomings of blockchain technology.

Why Was BTC SegWit Created?
---------------------------

As briefly mentioned above, there were several major reasons why this new transaction format was created. Before its creation, crypto enthusiasts could only use one kind of address to carry out BTC transactions – Legacy (P2PKH). That’s why you might hear people discussing SegWit and Legacy BTC. “Legacy” is a word that is much easier to memorize than P2PKH or any other name that could be used for the original version.

The relatively small size of the original BTC blocks eventually led to network congestion, meaning that the processing time gradually increased. The transactions could not be processed as quickly as before due to the fact that interest in BTC was growing larger over time. That meant that the congestion would only increase as the transactions became more numerous and, as a result, they became more difficult to process.

The solution was introduced in the form of an additional layer. A certain percentage of transactional data will now be deployed on an additional layer to reduce the burden on the main network. That offloaded data was comprised of the witness data, otherwise known as SegWit (or segregated witness).

To sum it up, here’s how it happened:

1.  Interest in BTC grew as more people started using it. As more people used BTC, accumulated transactions clogged up the main chain.
    
2.  A solution was introduced in the form of an additional layer that helped decrease the burden on the main chain. In other words, witness data was removed from the main blocks.
    
3.  An additional benefit of the transition from Legacy to SegWit was manifested through increased protection against transaction malleability.
    

BTC and SegWit: Highlighting the Main Differences
-------------------------------------------------

Now that we have briefly explained the nature of SegWit and the reasons for its creation, let’s underline its biggest distinction from the original BTC.

*   Format. Legacy uses the P2PKH format, while the BTC SegWit address does not. SegWit’s Bech32 address and P2 styles are the first major differences between BTC and BTC SegWit.
    
*   Wallets. People were worried that it would be impossible to convert their funds from one BTC wallet to the other, but those concerns were groundless. You’ll be able to freely transfer funds between SegWit and Legacy wallets, even though they are different.
    
*   Transactional costs. The costs involved in crypto transactions are the biggest deciding factor for most people since nobody wants to overpay. It’s cheaper to use BTC SegWit.
    
*   Speed. Paying less is important, but not having to wait a few hours or days to have your transaction processed is also crucial. SegWit emerged when the backlog of transactions became too great to be processed quickly, and now it still offers superior transactional speed. As BTC SegWit removes witness data, transactions become faster naturally.
    
*   Security. One more advantage that SegWit BTC has over BTC Legacy is security. It’s underrated compared to the faster speeds and lower costs, but it still is a very important point of difference. It’s one of the reasons why the more involved crypto enthusiasts have been supportive of the project right from the start. Thanks to the fact there are separate signatures, hackers now have a more complex task on their hands: it is way harder to meddle with transaction data and other code. 
    

To summarize, BTC SegWit offers several advantages over BTC Legacy. But is it a better option overall? Let’s discuss that below.

Which Option is Better? Should You Use BTC SegWit or BTC Legacy?
----------------------------------------------------------------

This is hardly one of the hot takes that you are used to seeing from the Exolix team. It is pretty obvious that BTC SegWit offers a multitude of advantages over BTC Legacy, but the reality is that both are quite interesting options to consider. It certainly is interesting to learn the full story and understand the difference between the two.

The number and the sheer impact of all the improvements made during the transaction to BTC SegWit speak for themselves. Quicker transaction speed, lowered fees, increased security, and other features instantly made BTC Legacy seem obsolete to at least some subset of crypto investors and entrepreneurs. That’s why there is a common opinion that the BTC SegWit is the superior option.

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n the crypto community, the term SegWit is used to refer to an alteration in the transaction format of Bitcoin. 

What Is the Difference Between BTC and BTC SegWit?

What is a 51 attack in blockchain? Let’s start by giving you a simple explanation. So, a 51% attack is a direct attack on a blockchain. A better understanding of the nature of this attack requires a better understanding of the technology itself.

In short, blockchain is where data is stored in blocks and interlinked together to build an information chain. In the world of crypto trading, various blockchains are used to document cryptocurrency transactions. In order to add blocks and receive financial rewards, you need to “mine”. Each system of several mining machines has a set hash rate, i.e. the combined speed of all mining machines within a network.

A 51% attack is called so because it’s carried out by people that accumulate more than 50% of the network’s overall mining/computing power or hash rate. If successful, the attackers can pretty much rule over the entire network, influencing transactions and disrupting certain markets and cryptocurrencies.

Recent Examples of Successful 51% Attacks
-----------------------------------------

Despite what some experts say, 51% attacks are far from a hypothetical problem. We already have a couple of really big ones:

*   2018 – The attack on Bitcoin Gold (BTG) resulted in more than $18 million worth of crypto assets being double-spent.
    
*   2018 – Repeated attacks on Vertcoin (VTC) also resulted in copious double-spending.
    
*   2019 – Ethereum Classic suffered a damaging 51% attack. More than $1 million of ETC was double-spent as a result.  Three more attacks occurred the following year.
    
*   2020 – Grin (GRIN) became the victim of a 51% attack, but was able to quickly regain control, preventing the permanent damage.
    
*   2021 – Bitcoin SV was attacked three times. People understood better what 51 attacks were, so BSV suffered mostly reputational damage due to suspicious circumstances related to the attacks. Prior to that, it was [delisted](https://beincrypto.com/australias-biggest-exchange-to-delist-bitcoin-sv/) by a major Australian exchange website, Independent Reserve.
    

What Is a 51 Attack & How Does It Work?
---------------------------------------

We already have surface-level knowledge of what a 51 attack is and that it rocked several smaller cryptos in the past. Now let’s give you a more detailed understanding of how it all works in the world of blockchain.

As mentioned above, in order for crypto transactions to occur, freshly mined blocks have to be validated by a consensus of mining machines in the network. When the validation finally happens, the block is added to the chain.

Blockchain operates on a total decentralization basis, which means that the entire system that stores information regarding transactions is as much decentralized as a network’s hash rate is. When a certain miner or a group of miners takes control of over 50% of the total hash rate, the crypto network is in peril. Attackers can:

*   Leave out new transactions from the logging;
    
*   Switch the order of transactions;
    
*   Stop new transactions from being confirmed/validated;
    
*   Thwart all other mining activities;
    
*   Reverse already completed transactions in order to spend the coins twice.
    

Any of the above-mentioned harmful actions can result in a lot of value being lost. When a 51% attack is launched, it’s a huge reason for concerns not only for investors but for the crypto community as a whole.

User Side: What Are 51 Attacks?
-------------------------------

You have to know that there are certain risks involved if you are a crypto investor. 51% attacks, as unlikely as they might be, are one of them. You should take them into consideration while investing in minor coins or taking part in a network’s activity.

These types of attacks are rare because they are extremely costly, so experts urging you to convert all your crypto assets into cash probably don’t have the best understanding of how any of it works. Of course, if you are sure about your security, you might deliberately stay away from small and suspicious cryptocurrencies. The possibility of more popular crypto being attacked is almost zero.

Overall, what is a 51 attack crypto? Now you understand that it is a type of fraudulent hacker activity that has little impact on your life but you still need to be aware of it. Let’s talk about the main prevention methods and address some of the most popular questions.

Can a 51% Attack Be Detected or Prevented?
------------------------------------------

Yes, a 51% attack can be both detected and prevented. The detection methods are nowhere near as important as the methods that allow people to fully deter such attacks. Key prevention methods include:

1.  Choosing Proof of Stake. Some consensus algorithms offer more protection than others. PoS is less susceptible to 51% attacks than PoW (Proof of Work). As you can prevent certain attack scenarios with different means, it’s a solid swap to consider.
    
2.  Placing limits on miners. There has to be a 50% limit on hashing power. This way, a protocol can make sure that there’s not a miner or a group of miners responsible for over half of the network’s hash rate.
    

Harnessing the power of the community. With PoS and a strong community, it's MUCH harder to carry out a successful attack. The community has to vote to determine if a person can be a block validator (the same thing as a miner in PoW systems). If the community is suspicious of someone (due to them accumulating power to carry out the attack), they can simply kick them out.

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What is a 51 attack in blockchain? Let’s start by giving you a simple explanation.

What is a 51 attack in blockchain?

What is a 51 attack in blockchain? Let’s start by giving you a simple explanation. So, a 51% attack is a direct attack on a blockchain.

What Is a 51% Attack & Why Does It Need to Be Detected?

Some people seem to think that when it comes to taxes, there’s always a bit of wiggle room when it comes to determining what is tax-deductible. Others are scared to death of the IRS and are willing to go to any length to keep the IRS happy. Today, we are going to examine the IRS definition of a day trader and what it might mean for those that make money trading cryptocurrency.

Remember that you are always welcome to reach out to the Exolix team if you have a question that wasn’t answered in the FAQ section or if you have something to add to the discussion. Alright, let’s get into it.

## Who Does the IRS Consider a Securities Trader?

There are many people who make a living from day trading. In fact, it’s something that’s been getting more and more traction in recent years as many new online trading platforms have popped up. The rise of cryptocurrencies (cryptos are securities in the eyes of the IRS) has also impacted the day trader game in a meaningful way.

Now, it is very important to establish that there are three key points to the IRS definition of a day trader. In order to be categorized as someone who trades securities, you need to:

1.  Try to profit from day-to-day market fluctuations. In other words, you make money thanks to shifts in prices of the above-mentioned securities and not from capital growth or payment of dividends;

2.  Be active in the market;

3.  Trade continuously and regularly.

Further points to consider:

*   Are your holding periods for cryptos (or any securities) purchased and sold short? Are they long?

*   Do you trade every day? What’s the volume?

*   Do you make a living off of trading? Is it possible for you to make a living off of it?

*   How much time do you spend trading?

Even if you consider yourself a day trader, you might not necessarily fit the IRS day trader definition. If your crypto trading activities don’t amount to a full-fledged business, then you are classified as an investor, not a trader.

It’s pivotal to understand that you can be a day trader in some areas and an investor in others. It’s sometimes difficult to make a distinction between the two, and that is why it’s essential to keep all the records related to your trading activities. That way, you can always point to the data that proves you’re an investor, not a trader.

## IRS Day Traders - Further Clarifications

Even after thoroughly examining Publication 550, there are still some uncertainties related to the question “What does the IRS consider a day trader?” Still, there are questions that you can ask yourself to gauge how well you fit their definition. Let’s expand on some of the things mentioned before.

*   The first question to ask is how much time you spend on trading activities. There’s a common opinion that you have to spend at least 18 hours per week to fall under the category of a day trader. That being said, it can be a little murky, but 18 is the absolute minimum that you see mentioned in various legal opinions.

*   How many trades typically occur within a year? You have to have at least 1,000-1,200 trades in a 12-month period.

*   Are you interested in short trades only? Trying to profit from day-to-day market fluctuations is exactly what you do when you make short trades, so if you buy and sell on the same day (day trading), after a few days or weeks (short-term trading), then you fit the IRS’ description of a day trader. Keep in mind that holding assets for a month or more might put your day trader status into question.

*   Did you actually make a profit from your trading? When you subtract all the expenses, such as, for instance, withdrawal fees, paid software costs, and crypto advisor payments. Whilst it’s perfectly understandable if you had a bad year and landed in the red, you need to have at least three profitable years out of the last five.

*   Can you say that day crypto trading is your main job? It’s a big question that many crypto traders struggle with. At the end of the day, if you can’t point to evidence that clearly depicts your day trading has made you a living from it, then you are not a day trader. At least not in the eyes of the IRS.

Be sure to examine all the [information](https://www.irs.gov/taxtopics/tc429) that the IRS itself offers on this subject. Their website is the best source of tax-related information you can find and it provides detailed explanations, so be sure to check out the link.

## Cryptocurrency Day Trading and Tax Implications

Now we can take a break from dissecting the question “What does the IRS consider a day trader?” Let’s return to the real world and talk about day trading and its tax implications.

Day trading in the cryptocurrency market doesn’t differ much from regular day trading in stocks. It’s a short-term strategy that is risky but may potentially yield higher returns compared to holding your cryptocurrencies in a volatile market. Day traders buy and sell cryptos on the same day in order to make money off abrupt market movements.

If you are trading in the US, you are required to report every single one of the transactions in any event: whether it was a net loss or a net gain. At the end of the year, you’ll owe taxes based on whether or not you’re in the green if there’s any actual gain. It is possible for you to take advantage of a [tax deduction of up to $3,000](https://www.irs.gov/taxtopics/tc409) if you end up losing money.

Remember that only the overall net gain is taxed, so you don’t have to worry about calculating taxes based on every profitable transaction. Based on your income tax rate, financial losses to taxes can be rather insignificant, so it would still make sense for you to buy, sell, convert, and exchange cryptocurrency in order to make a profit.

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Even after thoroughly examining Publication 550, there are still some uncertainties related to the question like What does the IRS consider a day trader?

Who is considered a day trader by IRS?

Some people seem to think that when it comes to taxes, there’s always a bit of wiggle room when it comes to determining what is tax-deductible.

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