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As per the IRS tax code, it states that a single dependent whose unearned income is less than $1100 and whose earned income is less $12,200 does not have to file a tax return. I am a student, and I don't have a job. Since I don't have any earned income, I don't have to worry about the second requirement. However, I did invest in crypto and stocks this past year. At one point, I did have a net capital gain of around $1200. However, I have also incurred capital loss bringing my net gain to less than -$100. By the end of the year, I think I will break even or be at a slight loss.

In this scenario, must I or should I file a tax return? By the definitions and requirements of the IRS, I am assuming no. However, I have around a thousand transactions since I have been doing day trading this year. Even though capital gains are close to 0 or negative, the total annual volume (summation of all buys) is around $15,000. Does the IRS expect me to file a return just to show them everything adds up, especially since a good portion of my day trades consisted of crypto purchases?

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  • Great question. BTW you may not know this, in the US it's very easy (and generally quite FREE surprisingly) to file your tax return with taxact.com or the competitors. It may almost be worth doing it as "part of your business experience" you know? It will actually make it easier next year ... cheers
    – Fattie
    Nov 7, 2020 at 12:06

2 Answers 2

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The problem you face is that if other people/companies file forms related to your transactions that make it appear that you should file, then you have to file to be able to prove you owe no income tax.

Imagine this scenario. A person is married, and has a kid. They know that if they itemize, and take everything they are entitled to they won't owe any taxes. They won't face interest or penalties because they are getting a refund. Of course a few months after the deadline the IRS matches their 1099's and W-2 and doesn't find a return. So they calculate it. Of course they don't include the child, and they assume the standard deduction. Now they calculate that you owe. So they send you a notice, and include interest and penalties. So you end up filing to prove you don't owe anything.

You also only quote part of the rule:

You must file a return if any of the following apply.

  1. Your unearned income was over $1,100.
  2. Your earned income was over $12,200.
  3. Your gross income was more than the larger of
  • a. $1,100, or
  • b. Your earned income (up to $11,850) plus $350.

Now you are OK if your earned income is zero, but sometimes people have less than $12,200 in earned income and less than $1,100 in unearned income and think they are safe, but then get tripped by 3b.

The IRS also discusses who should file

Form 1099-B received.

Even if you aren't required to file a return, you should consider filing if all of the following apply.

  • You received a Form 1099-B, Proceeds From Broker and Barter Exchange Transactions (or substitute statement).

  • The amount in box 1d of Form 1099-B (or substitute statement), when added to your other gross income, means you have to file a tax return because of the filing requirement in Table 1 or Table 2 that applies to you.

  • Box 1e of Form 1099-B (or substitute statement) is blank.

In this case, filing a return may keep you from getting a notice from the IRS.

It doesn't match your situation exactly but it does discuss a reason to file could be to avoid a notice.

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  • Thanks for the response! If I don't file a return knowing that I don't need to, and the IRS still sends a notice, can I just send it in then if that ever comes up? What I mean is that I wouldn't face any penalties right since I never needed to file in the first place?
    – ARJ
    Nov 7, 2020 at 3:54
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    A few years back, stock trading would result in a end-of-year 1099 from the brokerage indicating the total sales of stock. It was then up to the taxpayer to deduct the cost basis on schedule D. If there was a missing cost basis for a single item, it was assumed to be zero, as if the sale of that item were 100% profit. 1-2 years later, the taxpayer would receive a CP2000 letter suggesting the "correct" tax bill from the zero basis-cost trades. An amended return can fix this, but it is better to get it right the first time, and save all your records.
    – Paul
    Nov 7, 2020 at 8:41
  • @ARJ - you know, this is a great question. But also: you raise ANOTHER great question: *wouldn't face any penalties right since I never needed to file in the first place ... ? Maybe you should ask that as a new question. Good one.
    – Fattie
    Nov 7, 2020 at 12:05
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    @ARJ: yes if you don't file and IRS does a 'SFR' (substitute for return), you can replace it by filing a real return, without penalty as long as you didn't owe. (But I agree with TomTom this is very unlikely; there are many thousands of much larger apparent nonfilers above you.) However, doing this year's return 2-3 years from now would be harder; not only must you keep or reconstruct your records, you either need to search out old-version software or do it by hand which can be quite tedious. 'FreeFile' only supports the normal filing season. Nov 8, 2020 at 3:18
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No, you do not. As you quote yourself - you are way below the profit limits. You ALSO have a pathetic low volume. Yes, 15k will look high for you, but any software that would (assuming one would) go through the trades will NOT look for someone with 15k trading Volume IN A YEAR.

I have to congratulate you for trading SMALL (it is obvious your account is small), but assuming 15k trading volume will be something the IRS looks at is delusional. They will see a TON of small trades - extremely small trades, because to get 15k with day trading IN A YEAR means your average trade must have been in the area of 10 USD or 20 USD. This is typical for learning or testing and not does not really show up.

They are way more interested in those people who actually have volumes giving them rebates (as in: hundreds of thousands or even millions of USD per MONTH).

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  • Thanks for the answer. Maybe my transactions don't actually amount to 1000. It was a rough estimate. Maybe my annual volume might be slightly higher. My average trade is around $40-50. But that's the average. Sometimes, I might put in $5 and sometimes even around $2000. I was just wondering if the IRS would be wondering how much I made on my $2000 transaction.Probably not, but I don't know. This is my first time dealing with taxes.
    – ARJ
    Nov 7, 2020 at 4:01
  • Just checked my trade history, and my annual volume is actually around $40K.
    – ARJ
    Nov 7, 2020 at 4:09
  • Ah, still not exactly big. Look, my smallest broker account has a volume of 600k last 30 days. Transactions the size of a single person meal are not noteworthy unless the resulting profit is hugh (i.e. high frequency trading). By any means your numbers are extremely low and as you said yourself, it is the profit that is the actual determinant anyways.
    – TomTom
    Nov 7, 2020 at 11:08

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