Trading, Cryptocurrencies and Taxes.

Taxes, taxes, taxes the word we all hate, but know how to pay them is one the key factor you need to master in order to success on your trading career. As mentioned before you will need to become your own financial agent expert, start saving money and track your trades to save for taxes from the beginning.

Crypto-currencies are considered an investment property and not a currency. You will owe taxes when you sell or exchange for services, products or even other crypto-currencies. This mean the gain or loss from any sale of Crypto-currencies is a capital gain or loss, similar to stocks, bonds and mutual funds.

Long-term capital gains are defined as gains made on assets like stocks, bonds, real state and crypto-currencies that you held for over a year. On the other hand, short-term capital gains come from assets that have been held for less than a year. As day trader your capitals gains will be consider short-term, and this gains are taxed as ordinary income. If your marginal tax rate has changed, your short-term capital gains will change as well. In the chart below we can see the 2018 tax brackets.

2018 tax brackets.

This mean if you day trade as a second job you need to add those gains to your other income. Imagine you are single and work as a realtor were you make $65,000 in a year, and as day trader you are able to make another 55,000$ in the same year. In total you are made $110,000 that year. Marginal rate for filing single with income between $82,500 and $157,000 is 24%.

Reporting Options:

For taxes proposes there is several options regarding reporting capitals gains and losses. The following are the most common techniques to report it.

1. Fist in, First out (FIFO):

“First in” refer to the first portion you bought and “first out” mean that that portion that you bought first is the one you selling first. For example: If you own 100 Ethereum, but you bought those Ethereum on a different period of time and at different prices. You bought 10 ETH at 200$ then 40 more at 350$ and you made a final purchase of 50 ETH at 400$. Then you decide to sell 15 of them at the price of 600$. In this case your capitals gains in which you need to declare taxes are: 4,000$ in the first 10 Ethereum and 1,250$ in the last 5. Below how this is calculated.

2. Last in, Fist Out (LIFO):

This time the last portion we bought is going to be the first we sell. Let’s see how it work with the same example. If we bought the same 100 Ethereum at same time and same prices as the example before. Our capital gains would be 3,000$

3. Specific identification:

In this case the taxpayer need to identify which asset is he selling. This means if you only want to sell the Ethereum you bought at 350$ and keep the rest, you need to specify and demonstrate that those ETH are the one you are selling. You can do this

Probably you are asking which of these method is better. The answer is there is no better method. Each of them are going to be better for different situations. FIFO is more common as a day trader. As a swing trader or long term investment probably is convenience to use all of them.

As final exercise lest see these three method in a more complex example. Imagine you have been trading for a month and you want to know how much you owe on taxes. In the following chart you will see all the trade made on the moth.