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:
- The IRS considers cryptocurrencies property rather than a currency or security
- Because of (1), the wash sale rule does not apply to cryptocurrencies
- Short term trades for stocks and cryptocurrencies are taxed at the short term capital gains rate
- 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.
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
What are my tax obligations under the following scenarios?
- Asset is a stock, trading cycle is repeated 1 time
- Asset is a stock, trading cycle is repeated 1,000 times
- Asset is a cryptocurrency, trading cycle is repeated 1 time
- 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.