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Want to learn everything you need to know to file taxes when day trading crypto? Begin understanding cryptocurrency tax reporting by reading this guide.

Are you aware that your cryptocurrency could be taxable? If you are day trading crypto, you could be looking at a hefty tax bill this tax season.

Cryptocurrency is considered to be property by the IRS. Failure to include cryptocurrency trades and usage in your tax refund will have the IRS knocking at your door.

Knowing which trades are taxable, which kinds of transactions are not taxable, and how it all affects your tax return or what you owe is crucial.

To help you get through a tricky tax season, we’ve put together a guide to what’s taxable and what’s not. Read through this guide to make sure you’re including everything you need to in your tax return.

Yes, Day Trading Crypto is Taxable

The simple answer to whether or not day trading crypto is taxable is, yes. The IRS views cryptocurrency as property. As such, it is subject to the same tax rules as any other capital gain loss.

It’s important to note that the IRS does not treat cryptocurrency as regular currency.

Because of how the IRS categorizes crypto you need to keep track of your moves as you trade or use crypto. You will calculate your potential tax based on how you use, buy, and sell your cryptocurrency.

If you are regularly engaging in day trading crypto you need to pay close attention to your gains and losses throughout the year. At tax time, these transactions can get complicated. It’s worth looking at refund-maximizing crypto tax software to help you accurately asses your tax liability.

What Crypto Transactions are Taxable?

Not all crypto transactions are taxable. Day trading crypto becomes a taxable event when you trade, use, or sell it. 

There are 4 common kinds of crypto transactions that are subject to tax. There are also transactions involving crypto that are not taxable.

Taxable Transactions

Making a FIAT Trade

If you trade your crypto for a standard currency, such as US Dollars, that transaction is taxable. This kind of transaction is called a FIAT trade.

Trading One Crypto for Another

If you buy one kind of cryptocurrency with another one, the IRS considers it a taxable event.

Using Crypto To Pay for a Service or Product

If you buy a service or pay for a product with crypto your transaction is taxable.

Getting Paid in Cryptocurrency 

If you are paid in cryptocurrency for work you do the IRS states it is a taxable event.

Non-Taxable Transactions

Giving Crypto as a Gift

If you give someone a gift of cryptocurrency, it is not considered a taxable event. Depending on what the recipient then does with the crypto, they may end up having to pay tax, though.

Using US Dollars to Buy Crypto

When you purchase crypto for the first time and use a standard currency, such as US Dollars, you are not subject to tax. This is because you have not made any money from the original purchase.

Transferring Crypto

If you transfer crypto from one electronic wallet to another one or transfer it between exchanges, you have not completed a taxable transaction. It’s not taxable because you haven’t made or lost any money from the transfer. 

Capital Gains and Losses

The important part of all taxable events relates to whether or not you have made a capital gain or loss. Because the IRS treats crypto as property, capital gain or loss is what is subject to tax.

You will pay tax on the amount of gain you make from the 4 main ways listed above. So, if you sell crypto into a standard currency, you will owe tax on the amount of profit you make from that sale. 

On the plus side, you can use any capital losses from day trading crypto to offset your debt to the IRS. 

Know Your Crypto Tax Rules

Keep this guide in mind when filing your taxes this year. If you sold, traded, paid with, or get paid in cryptocurrency, you completed taxable events. Include this information in your tax return.

Day trading crypto is great. Just make sure you’re prepared for the tax you will owe.

For more information about cryptocurrency, keep an eye on our website. We’ve got articles to help you understand every aspect of this fascinating currency.