Who is considered a day trader by IRS?

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. 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 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 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.

Frequently Asked Questions

Do I Have to Report to the IRS if I Don’t Sell Crypto?dropwdown arrow icon

When you swap your fiat currency for a crypto asset, it is not a taxable event. A taxable event occurs when you sell it.

Can Crypto Trading Be Considered Day Trading?dropwdown arrow icon

Yes, it can. However, you need to figure out whether or not you fit the day trader definition as outlined by the IRS. Taxes paid by a day trader dealing with crypto can vary wildly based on many aspects, but they are typically within the short-term capital gain range (10-37%).

How Does the IRS Know If You Trade Cryptos?dropwdown arrow icon

The IRS utilizes different methods of detecting cryptocurrency transactions. They also use advanced analytical tools to pin crypto wallets to real-life individuals. Also, many exchange sites report to the IRS when prompted.

Do Crypto Day Traders Have to Report All Transactions?dropwdown arrow icon

Yes. It is important for crypto day traders to keep track of their transaction history in order to keep their records straight. Each transaction must be reported.

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