It is very unlikely that crypto investors will qualify for “Trader Tax Status” (TTS) on their tax returns, although it is not impossible.
Day Trading and Professional Traders
Some investors – in and outside of blockchain – will want to qualify for TTS on their day trading activities. This treats your trading activities as a business rather than a regular investment activity. This has some downsides, but also comes with some major perks.
Most notably, deductions against investment income are very limited. After the Tax Cuts and Jobs Act (TCJA) eliminated miscellaneous itemized deductions, there are very few investment-related expenses that taxpayers are able to use to offset against investment income.
This is not the case for those with TTS. Like with a regular business, they are able to deduct expenses that are ordinary and necessary to the activity. This can include margin expense, the home office deduction, software programs, newsletters, dues and subscriptions, the cost of equipment used, etc. These costs can add up very quickly and the savings can be substantial.
But because of that, the IRS has very strict requirements for who qualifies. A taxpayer must meet all of these conditions:
- “You must seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation;
- Your activity must be substantial; and
- You must carry on the activity with continuity and regularity.”
Most Taxpayers Will Not Qualify for TTS
That doesn’t sound too difficult on the surface, but in practice the IRS definitions of “substantial”, “continuous”, and “regular” are fairly rigorous. Based on case law, in order to qualify as a trader the taxpayer must:
- Trade full-time – the same as you would with a real business. This means trading the majority of the day, every day that markets are open, with very few gaps/lapses in your activity
- Have an average holding period of 31 days or less (see Endicott v. Commissioner)
- Make at least 720 trades per year (see Poppe v. Commissioner)
- Have larger brokerage account sizes. It’s hard to make a full-time living trading on a $100 brokerage account. In order to qualify as a “pattern day trader”, you need a minimum balance of $25,000
- Have operations show that you have significant investment – both in terms of equipment and education – to achieve enough profit for trading to be your primary income source
Obviously, for most of us we do not meet those criteria – for crypto or traditional securities. But if you are a crypto investor, the criteria for TTS is likely going to be the same as it is for other investments. In the unlikely event that you meet all of them, you should be able to treat your crypto income and expenses as a business – absent any future IRS guidance that indicates otherwise.
Any accounting, business, or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.
