How to Report Crypto Trading Like a Business

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💠 Avoiding IRS Trouble: How to Report Crypto Trading Like a Business

For Businesses, Active Traders, and the General Public

byMinutes Crypto/November 14, 2025/inCrypto Blog

🚀 1. Overview: When Does Crypto Trading Become a “Business”?

Not everyone who buys and sells cryptocurrency is considered a business trader.
The IRS distinguishes between:

Investors, who hold crypto for long-term appreciation, and
Traders, who buy and sell frequently with the primary goal of short-term profits.

👉 Frequent trading alone doesn’t qualify your activity as a business.
What matters is intent, organization, and regularity — the same principles that define a trade or business under Commissioner v. Groetzinger, 480 U.S. 23 (1987).

💼 2. Investor vs. Trader: Understanding the IRS View

Criteria	Investor	Trader (Business Activity)
Purpose	Long-term holding for appreciation	Short-term profit from frequent trades
Trading volume	Occasional transactions	Continuous, high-volume activity
Records & systems	Basic logs for tax basis	Detailed accounting ledger, separate business accounts
Entity structure	Usually individual	May use LLC, S-Corp, or partnership
Tax treatment	Capital gains/losses	Ordinary income/loss if § 475(f) elected
Expense deductions	❌ Investment expenses under § 212 permanently disallowed under § 67(g)	✅ Full § 162 business deductions

💡 Key takeaway:
Investors can no longer deduct advisory, management, or research expenses. Only those who qualify as traders in a trade or business (under § 162 and Groetzinger) may deduct trading expenses.

🧾 3. IRS Guidelines: What Counts as “Carrying On a Business”?

The IRS evaluates trading activity under the same principles as any trade or consulting business.
Key indicators include:

✅ Profit motive – Are you trading primarily to earn income?
✅ Business-like conduct – Do you operate through a structured plan and maintain detailed records?
✅ Regularity and continuity – Is your trading frequent and organized?
✅ Capital and scale – Have you invested significant time, capital, and tools?
✅ Entity operation – Do you operate through a company (LLC, S-Corp, etc.)?

💼 Proper accounting systems matter.
Maintaining a professional ledger or accounting system—such as that offered by MinutesCrypto.com—is an important indicator that trading activity is organized and conducted as a business.
A complete accounting record of trades, realized and unrealized gains, related expenses, and supporting documentation helps demonstrate the “business-like conduct” required under Groetzinger.
The IRS considers such records strong evidence when determining whether trading qualifies as a trade or business under IRC § 162, allowing business expense deductions.

⚠️ The IRS closely reviews traders who claim business deductions without meeting the trade-or-business threshold. Misclassification can lead to penalties and amended returns.

💵 4. Tax Treatment: Investor vs. Trader

🪙 For Investors

Crypto = property (IRS Notice 2014-21).
Capital gain = selling price – purchase price (+ transaction costs).
Short-term (< 1 year): taxed as ordinary income (up to 37%).
Long-term (> 1 year): taxed at 0%, 15%, or 20%.
Investment expenses: Permanently disallowed under § 67(g) after the 2025 Act.
Only direct costs (exchange fees, gas fees) adjust basis.
Advisory, management, or subscription fees are no longer deductible.

Example:
Buy 2 ETH for $4,000 → sell for $6,000 → $2,000 capital gain taxed at capital-gain rates.

💹 For Business Traders

If your trading qualifies as a trade or business under § 162:

You may deduct ordinary and necessary expenses, such as:
- Trading platform fees
- Internet, software, research tools
- Office rent or home-office allocation
- Professional advisers (W-2 or 1099 for trading strategy services)
Without § 475(f): Gains/losses remain capital, but expenses are deductible as § 162 business expenses (if trader status met).

With § 475(f): Gains/losses become ordinary (mark-to-market); losses fully deductible; no capital-loss limitation.

💡 5. Why Consider a § 475(f) Election?

Even when business expenses are already deductible under § 162, the § 475(f) mark-to-market election provides unique benefits:

Advantages

Converts capital gains/losses to ordinary.
Removes the $3,000 capital-loss limitation.
Allows immediate deduction of full losses.
Eliminates wash-sale complications (for securities — crypto already exempt).

Trade-offs

Year-end mark-to-market taxes unrealized gains.
Loses preferential long-term rates.
Hard to revoke (usually five-year lock-in).
Only applies to “securities” or “commodities” under § 475(c) & (e).

🧮 Eligibility of Crypto for § 475(f) Election

To make a valid § 475(f) election, the assets traded must qualify as either “securities” or “commodities” under the Internal Revenue Code. Although the Commodity Futures Trading Commission (CFTC) has classified Bitcoin and Ether as commodities, the IRS has not formally confirmed that spot crypto constitutes a “commodity” (or “security”) for § 475 purposes.

Thus, while CME-traded Bitcoin and Ether futures clearly qualify (since they trade on a CFTC-registered exchange), spot crypto traded on retail platforms (e.g., Coinbase, Kraken) does not yet meet the definition of an “actively traded commodity” under § 1092(d)(1).

A crypto trader could argue eligibility for § 475(f), but doing so involves interpretive risk until the IRS or Treasury issues formal guidance. Consultation with a qualified tax professional is essential before electing § 475(f) for crypto assets.

⚙️ 6. Recordkeeping & Compliance Tips

Maintain:

Each buy, sell, swap, conversion (with timestamps)
Transaction fees and wallet addresses
Receipts for expenses and equipment
Copies of trading plans or algorithms
Year-end mark-to-market adjustments (if elected)

Good records are your best defense in an audit.

🌐 7. Grey Areas: DeFi, Staking, and Yield Farming

Until further IRS guidance:

Treat staking rewards, liquidity pool, and yield income as ordinary income when received.
Keep records by protocol and wallet.
Each crypto-to-crypto swap is a taxable event.

🧭 8. Practical Recommendations

Seek professional tax advice before electing § 475(f).
Do not assume non-cash swaps are tax-free — they aren’t.
Stay current on IRS digital asset reporting (Form 1099-DA) and broker rules.
File accurately — misreporting crypto can trigger civil or criminal penalties.

🧩 9. Summary Snapshot

Scenario	Likely IRS Treatment	Tax Form
Casual crypto investor	Capital gains	Form 8949 + Schedule D
Active trader (no § 475)**	Capital gains + business expenses (if TTS met)	Form 8949 + Schedule D + C
Trader with § 475(f)**	Ordinary income/loss (MTM)	Schedule C or Form 1120
Staking or DeFi income	Ordinary income	Schedule 1 or C
Mining activity	Business or self-employment income	Schedule C + SE tax

⚖️ 10. Final Word

The IRS does not set a numeric threshold for when trading becomes a business.
It evaluates facts and circumstances — frequency, intent, organization, and recordkeeping.

Being structured, organized, and transparent (with a proper accounting system like MinutesCrypto.com) helps demonstrate legitimacy and reduce audit risk.

💬 Trade smart — and trade compliant.

We welcome your feedback, questions and ideas, comment below or email us at hello@minutescrypto.com.

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📚 Authorities & References

IRC § 162 – Trade or Business Expenses
→ Governs deductibility of expenses for active trading businesses.
IRC § 475(f) – Election of Traders to Use Mark-to-Market Accounting
→ Allows qualifying traders in securities or commodities to treat gains/losses as ordinary income.
IRC § 67(g) (as amended by 2025 Act)** – Permanent Disallowance of § 212 Investment Expenses**
→ Confirms that non-business investment expenses are permanently nondeductible.
IRS Notice 2014-21 – Virtual Currency Treated as Property
→ Establishes that digital assets like Bitcoin are treated as property for federal tax purposes.
Commissioner v. Groetzinger, 480 U.S. 23 (1987)
→ Defines “trade or business” as activity conducted regularly, continuously, and with a profit motive.

✅ Note:

This summary reflects federal tax law and guidance as of November 2025.

Disclaimer

The information provided in this article is for general informational purposes only and does not constitute legal, accounting, or tax advice. Tax laws are complex and subject to change, and individual circumstances may vary, often resulting in different tax outcomes than those described under general rules. Readers are strongly encouraged to consult a qualified tax professional or advisor to obtain advice specific to their personal situation. The author and publisher assume no responsibility for any errors, omissions, or outcomes resulting from the use of this information.

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