Notice 2014-21 provides useful principles that can be applied to crypto transactions involving the use of margin. Under the Notice, cryptocurrencies are treated as property for federal tax purposes. Thus, gain or loss on the sale of cryptocurrencies is reported as a capital gain or loss with the tyre short-term vs long-term determined by the holding. Short-term If held one year or less or long-term if held more than one year.
Taxpayers may deduct investment interest only to the extent that such interest does not exceed net investment income for the taxable year (IRC 163(d)(1). “Investment interest” means interest paid or accrued on indebtedness properly allocable to property held for investment and generally includes margin interest IRC 163(d)(3)(A); Miner v. Comm’r, T.C. Memo 2003-39. Any investment interest that cannot be deducted in a taxable year because of this limitation may be carried forward to the succeeding taxable year.
if it is investment interest it gets reported on schedule A using form 4952. this requires that you itemize your deductions rather than taking the standard deduction. if you take the deduction is lost and there is no carryforward. This applies to investors in crypto.
it would seem active cryptocurrency (coin) traders can qualify for trader tax status (TTS) to deduct trading business expenses and home-office deductions on schedule C. https://greentradertax.com/cryptocurrencies-trader-tax-status-and-section-475-issues/ What does it take to be classified as a trader?
here's one opinion on what it takes to achieve TTS status for crypto.
Here are the GreenTraderTax golden rules for qualification based on an analysis of trader tax court cases and years of tax compliance experience.
– Volume: three to four trades per day. Don’t count when the coin exchange breaks down an order into multiple executions.
– Frequency: trade executions on 75% of available trading days. If you trade five days per week, you should have trade orders executed on close to four days per week.
– Holding period: The Endicott court required an average holding period of fewer than 31 days.
– Hours: at least four hours per day, including on research and administration.
– Taxable account size: material to net worth, and at least $15,000 during the year.
-Intention to make a primary or supplemental living. You can have another job or business, too.
– Operations: one or more trading computers with multiple monitors and a dedicated home office.
– Automation: You can count the volume and frequency of a self-created automated trading system, algorithms or bots. If you license the automation from another party, it doesn’t count.
– A trade copying service, using outside investment managers and retirement plan accounts don’t count for TTS.
