Is Crypto Day Trading Worth It?

Is crypto day trading worth it considering the tax implications? In the earlier days, anyone who wanted to trade in stocks and other commodities had to do so through a brokerage, trading houses or financial institutions.

After the dot com revolution, things really changed with the growth of several online trading platforms and discount brokerages.

This reduced the hassles of trading but, most importantly, this lowered the commissions and fees charged for making such transactions due to the increase in competition.

It leveled the playing field, or the trading field, to be more precise. Well, that was about 25 years back.

Then came the cryptocurrencies, with the first one, Bitcoin, being launched in 2009 and a host of other Altcoins stablecoins followed suit almost instantly.

These virtual coins took the financial world by storm and even threatened to replace it.

People showed a lot of interest in it since they were desperately looking for an effective, faster, and safer means that will enable them to make P2P payments without the need of any intermediaries.

Quite naturally, it attracted a large number of investors and traders, both individuals and corporations.

Crypto offers a lot of opportunities to traders and investors to make money and one of them is day trading.

This is the most common form of making money with crypto and is widely followed all over the world.

If you too are thinking on the same lines, it is vital for you to first know what crypto day trading is all about and what the tax implications of it are.

This article will take it one by one for you so that by the time you finish reading it you gain a comprehensive knowledge and confidence about crypto day trading and start your journey.

Is Crypto Day Trading Worth It Considering the Tax Implications?

Is Crypto Day Trading Worth it Considering the Tax Implications

Crypto day trading, ideally, is no different from stock day trading.

The only difference is that in stock day trading you deal with a stock or a security but in crypto day trading you deal with Bitcoin or any other type of crypto coins.

In both the cases, the assets are bought and sold within the same day.

It can be sold after a minute, an hour or couple of hours after buying but essentially it must be sold within the day.

And, as for stocks, you will need to sell it off before the exchange closes but in crypto you get some more time, since the crypto market never sleeps, but you cannot hold your positions overnight.

Crypto day trading is also called intraday trading that is typically stirred by the short term price movements of the assets circulating in the crypto market.

There are some popular techniques followed in intraday trading of crypto such as technical analysis, news-based trading which include corporate earnings, economic statistics and more.

Before moving on to the taxes of day trading, it will be very helpful for you to know about the different strategies of crypto day trading in brief.

HFT or High-Frequency trading – This is a process where dozens of trades are made in a second to make the most out of the price changes that happen in seconds or in fractions of that time.

Therefore, it is humanly not possible to keep up with such a fast pace which is why these types of intraday crypto trading needs using a trading bot.

This bot is a software program that monitors the crypto market continuously and executes the trades depending on the given logic. It can be done in combination with other trades.

Scalping – In this type of day trading, advantages of the small movements in prices of crypto coins over a short period of time are usually considered. These price changes are often the results of market incompetence due to rifts in liquidity or in the bid-ask spread.

The traders who follow scalping are called scalpers who take advantage of futures contracts or margins. However, such a trading process is risky which is why using different indicators is essential to manage risks inherent to it.

These indicators are volume heat maps, order book analysis, and a set of other technical indicators to enter or exit a position. This type of trading is therefore only for experienced traders.

Range trading – This specific crypto day trading strategy is based on speculating the changes in prices of the crypto coins within a specific time range in the future.

If the price falls below the lower bound of the range, it indicates that it is a good time to sell the crypto coins off since it signals the commencement of a noteworthy downward price trend. The opposite indicates the time to buy more crypto coins.

Technical Analysis – Commonly referred to as TA, Technical Analysis relates to the mathematical indicators and patterns to envisage the movements of prices of a crypto coin.

You may use a technical indicator that offers computer generated metrics or do it manually by simply analyzing the charts. One of the most commonly used technical indicators is the RSI or the Relative Strength Index.

This is actually a line appearing under the chart with values ranging between 0 and 100. If the indication is closer to 100 it means prices of the crypto coin may fall since it is overbought. Conversely, if it is closer to zero it means prices will rise for the oversold crypto coin.

News and Sentiment Analysis – This is a process that involves studying overall market sentiment and newscasts for crypto day trading. Big news and events often create significant ups and downs in the prices of crypto coins.

There are also a few websites that track the sentiment behind a specific crypto coin type based on the evaluation of Twitter chatter.

If there are more positive tweets, it indicates a bullish market sentiment, and if the negative tweets are more, it indicates a bearish market.

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As for the type of coins to choose, be informed that there is nothing called ‘best crypto coin for day trading.’ Your choice will typically depend on specific factors such as:

  • The way you trade
  • What is currently happening in the crypto market
  • Which specific day trading strategy you want to use and, of course
  • The tax implications on crypto day trading that will impact your profits.

Taxes on profits made from crypto day trading should never be ignored. This is because at the end of the day you will have to pay the taxes charged on you by the IRS no matter how big or small of a profit you book.

With all that said, crypto day trading is quite lucrative, but that is only true for those traders who have a ton of experience and have carefully planned strategies in place to follow.

However, this does not mean beginners cannot day trade crypto.

However, for that it is best to start small and choose a strategy and coin that suits them, their trading style, and needs.

And, before they start their crypto day trading journey, it is also vital now the market conditions.

Here are a few market conditions that the beginners need to know:

Entering and exiting a trade should be done quickly in a market with low liquidity without considering the prices too much.

Otherwise, the profits may be affected significantly if, in case, there is a slippage where you cannot liquidate a large position when you desperately want to.

In that case you may have to sell your position in increments, and also at lower profits than the earlier one.

This will result in fewer overall gains by the time you are able to sell the entire position.

Sometimes, the crypto market can be less volatile. In such situations, the prices of crypto coins will not move much.

This means that you will not be able to make a significant amount of profit by the end of the day.

And finally, the crypto miners can also affect the market conditions because they often sell the coins they mine, well, most of it. This eventually increases the selling pressure.

All these market conditions are not favorable for crypto day trading and you will therefore need to wait till the time the market picks up the pace.

Tax Implications

There are several tax implications of crypto day trading that you should be aware of before you start your venture.

First of all, it is most vital to know that the Internal Revenue Service does not consider crypto coins as currencies but as a property.

This means that buying and selling of crypto coins will be treated as a taxable event just as you buy any other property.

It will be typically considered as your capital gains.

Now, the question is whether you will be charged for the short term or for the long term.

Well, if you sell your coins within a year of purchase, you will be charged short term capital gains taxes on the proceeds.

If you hold the coins for more than a year before selling them it will be considered as your long term capital gains.

However, the rate of the long term capital gains taxes is comparatively much lower than the rate of short term capital gains taxes.

Typically, the rate may range anywhere between 0% to 40% depending on the term as well as the dollar value of the transaction.

This rate however may differ from one region to another and may even be updated from time to time by the IRS.

It is for this reason you are recommended to visit the official site of theirs to collect the latest information and rates.

If you are not very sure about it, you should always take help of an expert tax professional who is knowledgeable about crypto taxes.

Alternatively, you can also use one of the best crypto tax software available out there.

Either way, it will help you significantly to reduce your stress and make it relatively easy to calculate your crypto tax responsibilities.

It may also help you to save some money on your taxes but be fully compliant with the IRS crypto tax guidelines.

Typically, crypto tax reports are generated in three specific methods such as:

  • LIFO, or Last In, First Out method
  • FIFO, or First In, First Out method and
  • HIFO, Highest In, First Out method.

If you use a reliable crypto tax software program you will be able to generate your own tax reports very easily irrespective of the method followed.

Apart from that, the software will also help you to track your crypto asset portfolio.

The crypto tax software will further help you to do a lot of other important calculations for your tax purpose such as:

  • The cost basis
  • The fair value
  • The gains and
  • The losses.

Not only that, it will also help you to fill up the tax filing forms with the exact data thereby relieving you from the hassles and eliminating the chances of making any human errors.

In order to file your taxes, you will need to maintain a proper record of all the transactions made by you.

This can be quite tedious and there is a high chance of making errors in it especially if you make multiple trades.

Apart from that, there is the constant factor of crypto volatility which makes crypto trading and investing quite risky.

Therefore, it is needless to say that you must have a well-planned, well-organized, and well-designed strategy that is fully functional and very effective.

Using a crypto tax calculator and crypto tax software are therefore two essential tools that will save you from failing to meet your tax liabilities while day trading crypto.

In crypto day trading any small slip up may result in booking losses, and this can happen even to the most seasoned crypto day trader.

It is very easy to slip or skip one or a couple of transactions out of the hundreds and sometimes thousands of them made in a day.

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Therefore, it is good to use a good crypto tax software program.

You will find a lot of such crypto tax software both in free and paid versions out there on the internet.

There are also different types of subscription plans such as Do It Yourself or Tax Professional Assisted versions.

Though both are good, it is always advised to go for a paid and tax professional assisted version for better results.

However, thorough research is the key.

The Gray Areas

The value of cryptocurrencies, in all its forms, has increased multiple times over the years.

There are several derivatives, DeFi or Decentralized Finance platforms, Non-Fungible Tokens or NFTs, all of which are making waves and attracting a lot of traders and investors in this field to make money.

However, along with the hype it has created among the crypto investors and traders as well as everyone else, there surely are a few gray areas in it that you should also be well aware of.

One of the most significant ones is the tax implications.

This is not only because taxes are boring in general and there is an affinity in people to avoid it, but it is also due to the fact that most of the people are unaware of it and do not know what they are doing.

The IRS also seems to have no proper and clear guidelines published for the general public regarding the taxes to be levied and the consequences of it. As a result, the entire thing leaves a lot of gray areas.

Apart from that, the behavior of the traders and investors of crypto themselves create a lot of confusion and complications when it comes to taxes.

For example, a lot of crypto investors seem to like buying crypto on the dip and selling when the price is high, and they do it over and over again.

This makes it quite difficult to calculate the taxes on the multiple trades made.

Then the rates of taxes are itself quite confusing as well.

For example, if you hold your coins for over a year and the long term tax obligation is 20% flat, then you pay the same amount of tax as the other investor who might have held on to the coins for much longer than you.

Moreover, with such kind of tax rates over the long term, it would come to more or less the same thing if you traded your coins aggressively for a year or so considering your accumulated profits minus the tax on it.

In such a situation you may wonder why take the pain of trading your crypto and not hold it in your wallet for that particular period.

Also, crypto day trading is also a poor idea in terms of the fees and spreads that you have to pay for it, which is typically much higher than what you will have to pay while day trading in a traditional stock market.

Therefore, the overall fees and spreads of crypto day trading will eat away the profits.

However, the smartest way to day trade crypto is to find a middle path and follow it.

This path will typically consist of:

  • Holding onto your crypto coins for anywhere between a couple of week and a year at a time
  • Selling those coins when the market has its head stuck up and
  • Buying the coins back when people panic.

However, one thing that goes without saying is that there is a considerable amount of risk involved here.

And, there are no assurances in this Wild West of fintech.

While the market may be at its peak at one time, it may crash at the next very moment.

Nobody can tell anything with surety and everything depends on how exactly and precisely you figure things out as you go along.

Once again, research and choosing and sticking with one solid project are the key to success in crypto trading.

You will need only one and therefore you should avoid falling prey to those shiny and alluring traps.

You surely do not want to be the Warren Buffett of crypto! Therefore, stick to one particular project.

Cracking Down by the IRS

Typically, there are lots of ways in which the IRS or the Internal Revenue Service will come to know when you sell your crypto coins.

They have special mechanisms in place to crack down crypto transactions even if the crypto investors and traders do not withdraw any coin from their wallets and convert them later into fiat money.

One of the most significant ways is through the Form 1099.

This is a specific form that is sent by the crypto exchanges to the IRS to alert them about a particular crypto transaction.

This way the IRS will come to know whether or not a taxpayer is or has been trading crypto.

Apart from that, the IRS also relies on the blockchain analytics tools and uses them extensively to find out the actual person connected to any pseudonymous crypto wallet.

And, the new Travel Rule of the FATF or the Financial Action Task Force will track down every wallet owner that may be participating on the blockchain.

With this new rule now in place, in fact since June 201, crypto traders and investors can expect to receive calls from the local tax authorities.

Add to that, the IRS also has some more aggressive tools to pursue unpaid tax amounts.

These are usually done through liens on personal property, garnishments of wages, seizures of assets, and so on and so forth.

Therefore, do not try to avoid paying taxes if you owe it.

This will save you from further penalties and even more severe legal consequences.

Long and Short Term Capital Gains

As you may know, frequent and multiple transactions are the norm among the crypto and NFT traders.

While calculating the taxes on your crypto day trading profits, you must also be aware of the long and short of the story.

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Many new players in this space do not know how exactly gains in crypto day trading are taxed.

Ideally, when coins are not held for long, it falls under the short term capital gains taxes category.

The tax rate in this case is quite high and is almost at par with the income tax rate of any taxpayer.

On the contrary when the coins are held for a longer period and sold thereof, it is considered to be a long term capital gain and is taxed at a lower rate than the short term capital gains.

This difference in tax treatment is deliberately incorporated so that the investors are encouraged to hold on to their crypto coins for a longer period than sell them off quickly.

However, due to this difference, the crypto day traders typically have to foot a larger tax bill on whatever profits that might have made.

Avoiding the Nightmare

Now, all these may seem like a nightmare to you.

Well, in that case, here are a few things you should do for sure so that you can avoid your tax liabilities becoming a nightmare for you.

First of all, be informed that cryptocurrencies are subject to taxes in spite of the crypto transactions being advertised as being anonymous.

Therefore, leave behind the idea that you can avoid your responsibilities and do not expect them to go away.

If you do not pay your taxes, accrued interest and penalties on it will be added every single day till the time you pay up.

Therefore, you will unnecessarily overburden yourself with higher amounts of taxes.

If you think that you will go for the extension periods to file your taxes, think again.

This is because filing an extension will not get you off the hook.

The interest on unpaid taxes will continue to build up even in the extension period.

You may think about getting on a payment plan with the IRS if you feel that you will not be able to pay your taxes before the deadline. Just make sure that you do not say to them that you did not know your crypto earnings are taxable.

It will simply not be enough. Therefore, find quite a good and strong reason to substantiate your appeal.

If you do not have the fiat money to cover your taxes, you may swap further assets for fiat for it.

This is called a ‘sell to cover.’ But, once again, you should also consider the additional tax liabilities for such additional swaps of additional assets and add to your tax file.

No matter what, it can be quite a daunting task to navigate through the IRS tax implications for crypto day trading, especially if you do not have a lot of prior experience of it.

Therefore, it is prudent for you to rely on someone who does – a tax professional.

You will be better off when you consult with one of these experts and avoid messing up your crypto tax bill.

They are the ones who know about the set of deductions that you can claim on your crypto capital gains tax liabilities.

Add to that, there are also a lot of tax credits that you can use to your benefit and reduce the actual amount of taxes that is due.

Tax FAQs

Here are the answers of some common questions people usually have regarding the tax consequences of day trading crypto.

Knowing these answers will further enhance your knowledge and confidence.

Is reporting unsold crypto necessary?

Well, if you buy crypto coins with fiat money then by its own it is not considered to be a taxable event by the IRS.

Even if you hold on to your crypto coins after buying and the value of it increases over time, it will not be considered to be a taxable event and you will not have to pay any tax for it.

However, once you sell them, you will be liable to pay taxes on your proceeds.

If you sell your crypto coins within a year of its purchase, you will be charged short-term capital gains tax for it.

On the other hand, if you sell them after holding them for more than a year, you will be obligated to pay long-term capital gains tax.

Is crypto day trading taxable?

Yes, it is. The IRS views cryptocurrencies as a property and not simply as a virtual currency.

Therefore, it will be taxed just as the way other assets such as stocks and gold are.

This means that, if you buy and sell crypto coins on a daily basis then you will be liable to pay taxes on it because it will be considered as a sale, and potential profit.

Is there any way to save money on or avoid paying taxes on crypto gains?

Well, if you are liable to pay taxes, there is perhaps no legal way to avoid paying them.

However, you can save some money on your taxes if you use tax-loss harvesting.

In this process, you will sell your crypto coins when you are in a loss position.

This will offset capital gains and lower the taxes on the profit you may make.

This is a useful way for capital loss reduction on your income, even if there are no capital gains to offset.

Conclusion

Undoubtedly, crypto day trading is very lucrative but you should know about the tax implications of it.

As a beginner you may have some doubts regarding it, but this article must have cleared most of them. Now, consult an expert tax professional.