Does Crypto Count as a Day Trade? Trading & Tax Rules

Day trading is a strategy to profit from short-term market fluctuations in traditional financial markets. The rise of cryptocurrencies has opened new avenues for digital asset trading. Understanding how day trading principles intersect with cryptocurrencies’ unique characteristics and regulatory landscape is important. This intersection raises questions about trading rules and tax implications of frequent digital asset transactions.

What Day Trading Means

Day trading involves buying and selling a financial instrument within the same trading day, aiming to profit from small price movements. This strategy includes opening and closing positions rapidly, often within minutes or hours, and rarely holding positions overnight. Day traders utilize technical analysis and advanced trading platforms to identify opportunities in volatile markets.

In traditional securities like stocks and options, the Financial Industry Regulatory Authority (FINRA) enforces specific regulations for frequent traders. One is the Pattern Day Trader (PDT) rule. This rule designates an individual as a pattern day trader if they execute four or more day trades within five business days in a margin account, provided these day trades constitute more than six percent of their total trades in that account during the same period.

A requirement for pattern day traders is maintaining a minimum equity of $25,000 in their margin account on any day they engage in day trading. This balance, a combination of cash and eligible securities, must be present before any day-trading activities commence. The $25,000 threshold provides a financial cushion for high-frequency trading.

Should a pattern day trader’s account equity fall below this $25,000 minimum, they are prohibited from further day trading until the account is restored. If a day-trading margin call is issued due to exceeding buying power limits, the trader has up to five business days to deposit additional funds. Failure to meet such a call can result in the account being restricted to cash available trading for 90 days, or until the call is satisfied.

Regulatory Rules for Crypto Trading

The regulatory framework governing cryptocurrency trading differs from that of traditional securities, particularly concerning day trading rules. The FINRA Pattern Day Trader (PDT) rule, which applies to stocks and options, does not extend to cryptocurrency trading. This distinction stems from the classification of cryptocurrencies by the Internal Revenue Service (IRS).

The IRS treats virtual currency as property for U.S. federal income tax purposes, rather than as currency or a security. Because cryptocurrencies are not regulated as “securities” under federal securities laws for the purpose of the PDT rule, crypto traders are not subject to the $25,000 minimum equity requirement or trading restrictions. This means individuals trading cryptocurrencies on exchanges that do not operate as traditional broker-dealers are not bound by the same day trading limitations of the equities market.

Tax Implications of Frequent Crypto Trading

Frequent cryptocurrency trading, while not subject to the same regulatory day trading rules as traditional securities, carries distinct tax implications. For U.S. federal tax purposes, cryptocurrencies are treated as property by the IRS, as outlined in guidance such as IRS Notice 2014-21 and Revenue Ruling 2019-24. This classification means each time a cryptocurrency is sold, exchanged, or used to pay for goods or services, it is a taxable event.

The tax treatment of gains or losses depends on the holding period. If a cryptocurrency is held for one year or less before disposal, any profit is a short-term capital gain. Short-term capital gains are taxed at ordinary income rates, ranging from 10% to 37%, depending on the taxpayer’s income level. Conversely, if held for more than one year, profit is a long-term capital gain, subject to lower tax rates of 0%, 15%, or 20%. Frequent crypto trading often results in short-term capital gains, leading to higher tax liabilities.

Accurate record-keeping for every transaction is paramount for crypto traders to correctly calculate gains and losses and comply with tax obligations. This includes documenting the date of acquisition, cost basis, date of disposition, and fair market value at the time of sale or exchange. The IRS requires all transactions using virtual currency to be reported in U.S. dollars.

The wash sale rule differs between crypto and traditional securities trading. Internal Revenue Code Section 1091 prevents investors from claiming a loss on a security if they sell it and then repurchase a substantially identical security within 30 days before or after the sale. This rule does not apply to cryptocurrencies because they are not classified as securities for this purpose. This allows crypto traders to sell assets at a loss to realize tax benefits and immediately repurchase the same cryptocurrency, a strategy known as “tax loss harvesting,” without disallowance.

For professional traders, Internal Revenue Code Section 475(f) offers an election for mark-to-market accounting. This election is for those in the “trade or business of trading securities,” requiring substantial, continuous, and regular activity to profit from daily market movements. With this election, all gains and losses from trading are treated as ordinary income or loss, not capital gains or losses. This is advantageous because ordinary losses are fully deductible against other ordinary income, unlike capital losses, which are limited to a $3,000 deduction per year against ordinary income if capital gains are insufficient. It also bypasses the wash sale rule and capital loss limitations.

However, unrealized gains at year-end are also recognized as ordinary income, which can be a disadvantage if positions would otherwise qualify for lower long-term capital gains rates. The election must be made by the tax return’s original due date for the prior year.