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Background

I am trying to understand potential tax obligations for trading stocks and cryptocurrencies in the US. I was able to find the following information online:

  1. The IRS considers cryptocurrencies property rather than a currency or security
  2. Because of (1), the wash sale rule does not apply to cryptocurrencies
  3. Short term trades for stocks and cryptocurrencies are taxed at the short term capital gains rate
  4. Capital losses can only be used to offset other income up to a cap of $3,000

However, it is unclear to me how these rules are applied over multiple trades, and whether the rules differ for stocks and cryptocurrencies. I think an example might be the clearest way to answer this question so I outlined one below.


Scenario

Let's say I have $100 and am taxed at a short-term capital gains rate of 20%. Assume all trades are short-term and call the following sequence of events a trading cycle. Note that no matter how many times I repeat the trading cycle I have exactly as much money as I started with (assuming fees and transaction costs are zero). If it's relevant, assume the individual is considered an investor rather than a trader.

  • Buy $100 worth of asset
  • Sell position for $110
  • Buy $110 worth of asset
  • Sell position for $100

Question

What are my tax obligations under the following scenarios?

  1. Asset is a stock, trading cycle is repeated 1 time
  2. Asset is a stock, trading cycle is repeated 1,000 times
  3. Asset is a cryptocurrency, trading cycle is repeated 1 time
  4. Asset is a cryptocurrency, trading cycle is repeated 1,000 times

I would hope that there is no tax obligation under all 4 scenarios, but that seems too reasonable to expect of the IRS.

Edit: Bob Baerker provided an excellent answer with regards to stocks, but the question is still outstanding for crytocurrencies.

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+100

I'm not completely clear on your question, because it seems to make trading cryptocurrencies (CC for short) harder than it really is.

Also, be careful using the word "property"; CCs are property in the same sense that stock shares are property, but they are not "real property". Some people see the word "property" and internally convert it to "land".

As noted in https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions, simply trading in CCs is just like trading any other asset eligible for capital gains treatment:

  1. You acquire units for a basis, the basis being the price paid for them plus fees/commissions/etc. IOW, https://www.irs.gov/pub/irs-pdf/p551.pdf applies to them just like it does for stock shares.
  2. You dispose of them and receive net proceeds, which is the total sale amount minus fees/commissions/etc. IOW, https://www.irs.gov/forms-pubs/about-publication-544 applies to them just like it does for stock shares.
  3. The difference between the net proceeds and the basis is a capital gain or loss.
  4. If the CCs were held for one year or less, the gain or loss is short term; if held for more than one year, it is long term.
  5. Capital losses offset capital gains or ordinary income and are subject to limits and carryover, capital gains may be subject to NIIT. IOW, https://www.irs.gov/newsroom/capital-gains-and-losses-10-helpful-facts-to-know-0 applies to gain/loss from CC dispositions just like it does for stock shares.

Buying CC is not a reportable event; if you buy a block of CC every day, but never sell any, you have nothing to report on your income tax.

You report CC dispositions the same as for any other asset eligible for capital-gain treatment: on Form 8949. If you complete your "trade cycle" 1000 times during your tax year, you have 1000 reportable dispositions. Using your numbers, you won't have any tax obligation, i.e. you won't owe any tax from your CC activities, but the dispositions must still be reported.

Note that you do not have to itemize every individual CC disposition you have during your tax year on Form 8949; as explained at https://www.irs.gov/instructions/i8949#idm139852939415536, you can provide a separate list, and put the summary on Form 8949.

In the US, wash-sale rules apply to "securities", and CCs are not securities, so wash-sale rules don't apply. That's as of right now; I expect that to change within the next few years.

Wash-sale rules do apply to CCs for Canadian tax reporting.

It may be worth noting that receiving CC other than by exchanging fiat currency (i.e. dollars) for them creates taxable ordinary income at the time you establish dominion and control over the CCs. So mining, airdrops, additional CC units received from a hard fork, etc., are taxable-income events.

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  • This is a great answer. If you can assume a tax rate and roughly estimate part 3/4 in the question above, I'd be happy to accept it. – bphi Nov 9 at 14:23
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For stocks:

(1) Buy $100 worth of asset

(2) Sell position for $110

 $10 gain

(3) Buy $110 worth of asset

(4) Sell position for $100

 -$10 loss

A cycle consists of four trades and the net gain from these two closed trades is zero so there is no tax due.

Now you do it again with (5), (6), (7) and (8) which is a repeat of trades (1) through (4).

The only problem that might arise is (5). If (5) occurs within 30 days of realizing the $10 loss then you'd have a wash sale violation. In terms of taxes, that violation is meaningless if closing trade (6) occurs within the same calendar year. If not closed in the same calendar year then you'd have a carryover wash sale violation of $10, LOL.

If you traded some real size and met the qualifications for Trader Tax Status then you'd be allowed to use Mark-To-Market accounting and the wash sale rule would not apply at all.

  • To summarize, assuming all trades are completed within one year, all four scenarios will result in no taxes? – bphi Nov 2 at 18:22
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    That would be the case for options and equities. I have no experience with crypto so I defer on that one. – Bob Baerker Nov 2 at 19:24
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If you moved your cyrtpocurrency to Coinbase, no one but you has any idea how much you paid for it, or even when you originally acquired it. As such, Coinbase won't be able to report the cost-basis to the IRS.

If you move cash into Coinbase and then buy and sell crypto, they will report cost-bases to the IRS, and report it to you in the Form 1099 family.

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