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Quote from: The1AndOnlyFIRE on February 26, 2016, 12:57:30 PM

I have a question about this. I'm looking at getting into some small time trading.

I've been watching how the number go up and down each day, tracking it for a bit now and feel confident I can make money day trading.

The problem is how exactly the taxing works. Say I start with $2,000 and I wait for a low point, trade into bitcoin, way till it peaks that day. Normally a $20 difference roughly, so at $2,000 that would be trading it back into $2,100.

Say then it gets low again. I trade back into bitcoin then it gets high. I trade again, I get 2200. Now are they only gonna see the 2100 and the 2200 and tax me for 4300 dollars worth of income? When truthfully I only gained 200 dollars.

I don't mind being taxed for what i actually gain but if they're taxing me for the full amount that gets converted into usd each time, I could never make any money. Say i made 100 profit a day, that's 36,500 a year using the earlier model, ie. trading back and forth once a day.

If they taxed me for what I trade back into USD each time I would get taxed for something like $770,000

Are you one of those people who doesn't take a breath when talking?

Answer:

First, if you are a day trader, then the rules are different. This would be a business and probably your primary income. Most people aren't.

So as an individual, you are taxed only on gains (and losses) not the whole conversion. In your first example, you made $100. That is $100 short-term capital gains.

Next trade, you put $2,100 in and get $2,200. Another $100 short-term capital gains.

Now, say you put that $2,200 back in and only get $2,000 out. Now you have a $200 loss, which means you net gain is zero. No income, no taxes.

There is an added complication if you were using Bitcoins you already owned, which is that you'd have to take their cost basis into account when you started. However, if you don't own any and are just starting with a USD balance, then at the end of the year you can just take your final USD balance less what it was when you started. That's your gain (or loss) and is capital gains income.