Cryptocurrency Trader or Investor – The IRS View

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  • Many identify themselves as a ‘cryptocurrency trader’, but the IRS may think differently
  • There are tax advantages to be listed as a cryptocurrency trader, and therefore strict criteria
  • Each case is decided independently with no clear benchmarks

Many of those in the cryptocurrency space may put down ‘cryptocurrency trader’ on their tax return as their employment, but in the eyes of the IRS they may be anything but. There are certain tax advantages to being considered a cryptocurrency trader by the tax office, and it is for these reasons that the IRS is keen to have as few recognized cryptocurrency traders as possible.

As a result, the IRS has very specific guidelines in order to make such calls, and this guide offers an overview of what they look for when determining whether someone is a cryptocurrency trader or not, and what you need to do in order to qualify.

Cryptocurrency Trader, Investor, or Dealer?

The IRS defines a cryptocurrency trader as someone who seeks to “profit from daily market movements in the prices of securities”. This is different from investors who buy and sell less regularly on the expectation of eventual profits, dividends, and interest from their holdings (e.g. staking). It is also different from dealers who “derive their income from marketing securities for sale to customers or from being compensated for services provided as an intermediary or market-maker.”

The IRS considers investors and dealers to be more sporadic in their activities, whereas a trader must “carry on the activity with continuity and regularity”. As well as looking into the frequency and nature of your trades, the IRS will look at other criteria including:

  • Typical holding periods for securities bought and sold
  • The frequency and dollar amount of your trades during the year
  • The extent to which you pursue the activity to produce income for a livelihood
  • The amount of time you devote to the activity

The IRS has no publicly listed benchmarks you must meet in order to qualify as a trader, with each case being judged independently. They are also very clear that they set no store in how you define your own activities, stating that if you don’t meet the ‘trader’ criteria “it doesn’t matter what you call yourself…you’re an investor.” Ouch.

Keep Records

To aid their case to be considered a trader, an individual should keep detailed trading records to back up their claim, making sure to distinguish any holdings kept for investment from those in the trading business.

As the IRS works on a case by case basis there is no guarantee that even doing all this will result in you getting the go ahead to consider yourself a cryptocurrency trader, but with the ability to potentially bypass the default limit on capital loss deduction (currently $3,000 per year) there are definitely advantages to doing so if you’re trading activities can warrant it.

And don’t forget that there’s no point trying to fool the IRS – they have access to the data held on Coinbase, BitStamp and others, so they will be able to tell if you’re trying to pull a fast one.