‍

Wondering how crypto margin trading can amplify your purchasing power up to 100 times? Or, how will your profits be taxed? What about the losses and risks? Well, this article answers all your doubts and more. 

Whether you are looking for insights on margin trading or want to know about the tax implications on the profit that you just made, this guide has everything that you need to know about crypto margin trading.

What Is Crypto Margin Trading?

Crypto margin trading is the process where you borrow funds from exchanges or a broker to trade cryptocurrencies. Once you have earned the desired profits, you pay back the borrowed amount including a minimal interest. 

In this trading method, you use “leverage” to trade a larger position than your actual investment, which can amplify the returns. To use margin trading, you need to pledge collateral to the exchange you are borrowing from. 

For instance, if you own ETH worth $4000 and want to margin trade from an exchange platform offering 50x leverage, you can deposit $4000 of your ETH to access $200000 funds.

However, it's important to keep in mind that this practice also increases the risk involved. If the trade goes against your expectations, you could end up owing more money than the initial investment.

What Is Leverage?

We just talked about how you can use “leverage” for amplified returns on your trade. But what exactly do we mean by this term?

In crypto margin trading, leverage refers to the ability to multiply your initial trading investment by borrowing additional funds from a broker. For example, a leverage of x5 means for every 10$ of your investment, you can trade 5 times the amount, i.e. 50$.

Leverage is expressed as a ratio of your actual investment capacity and the increased investment capacity. If we take the previous example, the leverage ratio will be 1:5.

While margin and leverage may sound similar, they are in fact inversely related. This means the higher the margin, the lower the leverage. 

You can calculate this with a simple equation:

Leverage = 1/Margin Requirement

Where margin requirement is the percentage of the deposit you need to make to use the leverage.

Here’s An Example Of Crypto Margin Trading…

Suppose you have $4000 in your margin account and you want to invest in BTC. If you now trade at 50x leverage, your purchasing power increases to $20000. 

The $4000 deposit you need to make to open the position is called the “required margin”. You can calculate the “margin requirement” as (4000 / 20000) x 100 which equals 2%.

Now you can purchase $200000 worth of BTC with a deposit of only $4000. If the market moves up by 2%, you make a profit of 100% on your margin (+$4000). However, if the reverse happens, you lose your initial investment and no longer meet the exchange’s margin requirement. In this case, your collateral could be liquidated.

How Does Cryptocurrency Margin Trading Work?

Crypto margin trading can increase your exposure to the market beyond the funds you have on hand, which can amplify both gains and losses.

Here's how it works:

1. You open a margin trading account with an exchange or a broker that offers margin trading services.
2. You select the cryptocurrency you want to trade and decide on the amount of leverage. For example, if you have $1,000 in your account and use 5x leverage, you would have $5,000 in buying power.
3. Now, you place an order to buy or sell a cryptocurrency using borrowed funds.
4. The price of the cryptocurrency then moves up or down, and you either make a profit or incur a loss.
5. You then close the position by selling the cryptocurrency or buying it back to repay the borrowed funds, including any interest charged by the broker.

Short Margin Trading vs Long Margin Trading

Short margin trading in cryptocurrency refers to a trading strategy where you borrow funds to sell a crypto with the hope of buying it back later at a lower price. If the price actually falls, you can then buy the cryptocurrency back and repay the loan, keeping the difference as profit. However, if the price rises, you incur a loss as now you will have to buy back the cryptocurrency at a higher price to repay the loan.

Long margin trading is when you borrow funds to purchase a cryptocurrency at a lower price with the hope of selling it later for more. If the price rises, you earn the difference amount as profit. However, if the reverse happens, you may lose all your investment. 

How Is Crypto Margin Trading Taxed?

Before you learn more about the taxation of margin trading in crypto, here are a few trading terms that you should be familiar with.

• Leverage: This refers to the amount by which you can multiply your purchasing power with a margin. The higher the leverage offered by the exchange, the lower the margin you need for the same trade.

• Collateral: This is the asset (in this case cryptocurrency) you need to deposit as a security to borrow funds from the exchanges. Depositing collateral for a crypto loan is considered a non-taxable event.

• Fees: Any fees paid during the margin trading including transaction fees, and interest paid can be added to your asset’s cost basis.

• Liquidation: If you lose the trade and do not meet the minimum margin trading requirements of the exchange platform, your collateral could be liquidated. This is considered a disposal and is subject to capital gains tax. Depending on how the price of your asset has changed since the time you first purchased it, you may incur a gain or loss.

• Gains and Losses: Any gains made using the borrowed funds are subject to capital gains tax. If you make a loss in margin trade, you should report it as a capital loss which can be used to offset your gains.

The taxation of crypto margin trading depends on your jurisdiction and can vary across countries as follows:

Crypto Margin Trading Tax In the US

In the United States, the IRS considers cryptocurrencies as a “property” for tax purposes. This means any gains or losses from trading cryptocurrencies are subject to capital gains tax. To learn more about US capital gains tax, refer to this guide.

Crypto Margin Trading Tax In UK

While the HMRC has no clear guidelines for crypto margin trading tax, any gains or losses made from the trade may potentially be subject to capital gains tax for individuals and income tax for businesses. To see the UK crypto tax rules, refer to this guide. 

Crypto Margin Trading Tax In Canada

Similar to HMRC, the CRA does not have any guidelines on crypto margin trading tax but with other crypto tax implications, there’s a potential that the gains or losses made from the trade may be treated as capital gains tax for individuals and income tax for businesses.

Crypto Margin Trading Tax In Australia

In Australia, the taxation of cryptocurrency margin trading profits are treated similarly to other forms of investment income. The ATO considers cryptocurrencies to be a form of property, and any profits made from buying and selling cryptocurrencies, including those made through margin trading, are subject to capital gains tax for individuals and income tax for businesses. To learn more, refer to the  Australian crypto tax guide.

What Are The Best Crypto Margin Trading Exchanges?

With multiple exchanges offering you as high as x100 leverage and appealing features, it may get hard to choose the best option for your margin trade. 

Here’s the list of the best crypto margin trading exchanges that you can consider:

• Binance: As the world’s biggest crypto exchange by trading volume and with the highest liquidity in the market, Binance is easily one of the best platforms for crypto marding trading.  It provides 600+ trading pairs, supports both short and long position with up to 20x leverage, and even provide insurance funds to protect the platform’s liquidity in all cases.

• Bybit: With more than 10 million registered users, Bybit is an easy-to-use, user-centric exchange platform that provides up to 100x leverage on margin trading. It also has insurance funds to recover losses in case the users are not able to pay them back.

• Kraken: With 5x leverage and low fees, Kraken is a great option for US residents looking for margin trading in crypto. It is one of the few exchanges offering margin trading that is licensed within the US.

• CEX: It is one of the oldest exchanges available in the market and is registered with FinCEN. It currently offers up to 10x leverage for crypto margin trading.

How Can Crypto Tax Software Help?

Crypto margin trading tax can quickly get complicated with multiple trades in place and variable country laws. Using a crypto tax software like Kryptoksatt can take the tax hassle out of the picture and you can completely focus on your trades. 

From importing your crypto transaction history to generating tax reports that comply with your current local laws, Kryptos does all the hours of work in a matter of minutes. It even ensures there are no errors in calculations and you are able to benefit from applicable tax-saving strategies. 

Calculate Taxes For Free Today

FAQs

1. How is crypto margin trading taxed?‍

Crypto margin trading tax depends on the country you are located in. In countries like the US, the profits or loss made from margin trade is subject to capital gains tax. In countries including the UK, Canada, and Australia, gains/losses made from margin trading is subject to capital gains tax for individuals and income tax for businesses.

2. What is shorting in crypto?

Shorting refers to a crypto margin trading strategy where you sell a cryptocurrency at a higher price in the hope to buy it back at a lower price. 

3. How can I calculate and report my margin trading gains? 

To calculate your margin trading gains, you need to calculate your asset’s cost basis which is the initial price at the time of purchase and includes any added fees. Now subtract the cost basis from the overall gross proceeds to find your capital gains. 

4. What are the best crypto margin trading exchanges?

Some of the best crypto margin trading exchanges include Binance, Bybit, and Kraken.

5. How Does Margin Trading Work?

In margin trading, you borrow funds from an exchange or broker to increase your purchasing power than what you originally have. To do this, you need to keep a collateral in the exchange’s account. Depending on the leverage they provide, you can now trade up to 100 times more than your original investment.

‍

All content on Kryptos serves general informational purposes only. It's not intended to replace any professional advice from licensed accountants, attorneys, or certified financial and tax professionals. The information is completed to the best of our knowledge and we at Kryptos do not claim either correctness or accuracy of the same. Before taking any tax position / stance, you should always consider seeking independent legal, financial, taxation or other advice from the professionals. Kryptos is not liable for any loss caused from the use of, or by placing reliance on, the information on this website. Kryptos disclaims any responsibility for the accuracy or adequacy of any positions taken by you in your tax returns. Thank you for being part of our community, and we're excited to continue guiding you on your crypto journey!