How to Report Cryptocurrency Day Trading and Short-Term Gains or Losses on Taxes

So you’ve been day trading cryptocurrencies – buying and selling cryptos like Bitcoin or Ethereum within the same day. Now it’s tax time and you need to report all those trades to stay on the right side of the IRS. Don’t worry, I’ll walk you through step-by-step how to handle crypto day trading on your taxes!

First things first – the IRS treats cryptos as property, not currency. That means any time you sell crypto at a profit, it counts as a capital gain, even if you only held it for a few hours. And if you sold at a loss, that’s a capital loss.

Do You Need to Report Crypto Day Trading?

Yep – the IRS requires you to report all crypto transactions, including day trades, on your taxes. The days of flying under the radar are over. In 2019, the IRS started sending letters to crypto holders who potentially failed to report income and pay taxes.

So if you don’t report those day trades, you could get flagged for an audit. And trust me, you don’t want to deal with an audit – it’s a huge hassle. Better to just report your activity accurately from the start.

Are Crypto Profits Taxed?

You bet. Any time you sell crypto for more than you paid for it, that profit is taxable. It doesn’t matter if you trade it for USD or use it to buy something – as soon as you dispose of crypto for more than you acquired it for, you have a taxable capital gain.

For day traders making tons of quick buys and sells, those profits can really add up by the end of the year!

How Are Crypto Day Trading Profits Taxed?

Crypto profits are taxed based on how long you held the asset before selling:

• Short-term capital gains – You held the crypto for 1 year or less before selling. These gains are taxed at your ordinary income tax rate, which can be 10%, 12%, 22%, 24%, 32%, 35% or 37% depending on your total taxable income.
• Long-term capital gains – You held the crypto for over 1 year before selling. Long-term gains are taxed at special capital gains rates, which are 0%, 15% or 20% for most taxpayers.

Since day traders are buying and selling crypto within the same day, those profits will be short-term capital gains. Be prepared to pay your ordinary income tax rate on those!

How to Calculate Crypto Capital Gains

Figuring out your capital gains or losses for each trade involves a little math:

Capital Gain/Loss = Sale Price – Cost Basis

• Sale Price = The amount you sold the crypto for in USD
• Cost Basis = The amount you paid in USD to originally acquire the crypto

Let’s look at an example:

• You bought 0.2 BTC for $4,000 USD
• A few hours later, you sold that 0.2 BTC for $4,400 USD
• Your capital gain is $4,400 (sale price) – $4,000 (cost basis) = $400

Since you held the BTC for less than a year before selling, the $400 capital gain would be taxed as a short-term capital gain.

If you do a lot of trades, the capital gains can really add up! Make sure to calculate each gain/loss transaction-by-transaction.

How to Report Crypto Capital Gains on Your Tax Return

You’ll report your crypto capital gains on IRS Form 8949. This is where you list out each transaction, the capital gain or loss for it, and classify it as short or long-term.

The totals from Form 8949 get carried over to Schedule D, where your short-term gains are added to your other short-term gains/losses from investments. The same goes for your long-term activity.

Finally, Schedule D flows into Form 1040, your main tax return. Your net capital gains for the year get reported on line 7 of Form 1040 and taxed accordingly.

So in summary:

• Form 8949 – List every individual crypto transaction and its capital gain/loss
• Schedule D – Summarize your short-term and long-term activity
• Form 1040 – Report your net capital gains and calculate tax

Most tax software like TurboTax will guide you through this process seamlessly when you import your crypto transactions.

What About Crypto Losses?

If you sold any crypto for less than you paid for it, you can deduct those capital losses to offset capital gains. This helps lower your tax bill!

You report crypto losses on Form 8949 just like gains. The losses get carried over to Schedule D where they offset your gains.

For example, say you had $5,000 in short-term crypto gains, but also $3,000 in short-term losses. The $3,000 in losses would reduce your net short-term gains to $2,000.

Now here are some key facts on deducting crypto losses:

• You can use crypto capital losses to offset both crypto gains and gains from other investments like stocks.
• If your total capital losses exceed your total capital gains, you can deduct the difference against up to $3,000 of ordinary income like wages.
• Any remaining losses above $3,000 carry forward to future tax years.

So crypto losses can be very valuable in reducing your tax bill – make sure to report them!

Crypto Wash Sale Rule

Sometimes traders will sell crypto at a loss deliberately to claim the tax deduction, and then immediately buy it back cheaply. This is called a “wash sale”.

Unfortunately the IRS prohibits wash sales – if you buy back “substantially identical” crypto within 30 days before or after selling at a loss, the loss is disallowed. The rationale is you didn’t really realize a loss if you immediately repurchased.

So you can’t sell Bitcoin at a loss today and then rebuy Bitcoin tomorrow. You’d have to wait at least 31 days to avoid the wash sale rule. This prevents traders from artificially harvesting tax losses.

Crypto Tax Forms You Might Receive

If you traded crypto on a centralized exchange like Coinbase, you may receive some tax forms to help with reporting:

• Form 1099-K – This reports the gross proceeds from crypto sales. However, it doesn’t show cost basis, so you’ll still need to calculate gains/losses yourself.
• Form 1099-B – This includes both proceeds and cost basis info, making it very handy at tax time. But not all exchanges provide 1099-Bs yet.
• Form 1099-MISC – Reports crypto mining or staking income.

Even if you don’t get any tax forms, you still have to report crypto activity on your tax return. The forms just streamline the process a bit.

Tips for Crypto Day Traders at Tax Time

Doing a lot of crypto day trades makes tax prep more challenging. Here are some top tips:

• Use crypto tax software that can import all your trades and generate the required IRS forms. Trying to do it manually is a nightmare.
• Keep detailed records of your cost basis for each purchase, especially if you don’t get 1099-B forms.
• Consider an accountant if you have extensive trading activity – they can help ensure you don’t miss anything.
• Pay estimated quarterly taxes on your crypto profits to avoid a big tax bill next April. The IRS wants their cut in real time!
• Contribute to tax-advantaged retirement accounts like a 401k or IRA – you won’t pay taxes on those gains!
• If you lost money, don’t forget to deduct those losses!
• Never try to hide or omit crypto activity from your taxes – the IRS is cracking down.
• Use a first in, first out (FIFO) costing method as the default, since LIFO is prohibited.

The Bottom Line

Dealing with crypto taxes might seem complicated, but just take it step-by-step:

• Calculate each capital gain or loss
• Report on Form 8949 and Schedule D
• Carry totals over to Form 1040
• Don’t forget to deduct losses against gains!

Just be organized, thorough, and use good recordkeeping practices throughout the year. And consult a tax pro if you need help – they can make sure you maximize deductions and avoid missteps.

The more you trade, the more important it is to stay on top of crypto tax reporting. But if you take the right approach, you can manage those crypto capital gains and losses seamlessly at tax time. Just stick to the IRS rules, report accurately, and you’ll stay off the audit radar!

Let me know if you have any other crypto tax questions!