Margin trading and how is it taxed

What is crypto margin trading?

Crypto margin trading is a way for investors to maximize their earnings on market volatility. To do so, the investor borrows crypto funds in order to gain access to a higher amount of capital. This means that if the market shifts positively, you can make a larger profit than you would have done with your original amount of tokens. Once your position is over, you pay back the borrowed funds to the asset provider while keeping any profits made.

While this may sound like the simplest process ever, it’s important to take note of the risks involved. If the market moves negatively, it will amplify losses that you obtain, and depending on the amount of the fluctuation, you may lose more than you originally had to invest. As always with anything in crypto, we advise you to do your own research.

For future reference, buy lowing and sell high and profiting when the market rises is known as ‘going long’. Selling high and buy low and profiting when the market falls is known as ‘going short’.

What is leverage?

A term you’ll come across frequently when diving into the world of margin trading is ‘leverage’. In the scenario of crypto margin trading, leverage is the amount that your buying power has been raised to. A simpler way of explaining this is the leverage equals how many times of your investment that your capital is worth. For example, a leverage of 10x means that for every $10 you have invested, your buying power is $100.

How do you get started margin trading crypto?

As the DeFi market grows, so does the range of platforms on which you can margin trade crypto. Each platform has different features and options to choose from, so leverage can go beyond even 100x. You will need to assess the level of risk before engaging in any type of margin trading, as for example, if you’re trading with a leverage of 100x (which may sound very appealing), if the price drops by 1% you will have lost the entirety of your initial investment value.

FTX: FTX is a trading platform which has functionality for margin trading. FTX offers a wide variety of indices and leveraged tokens that can be traded on the futures or options market.

Bybit: Bybit is a trading platform that allows traders to long or short coins like Bitcoin, Ethereum, EOS and XRP with up to 100x leverage.

Binance Futures: Binance Futures specializes in margin, derivatives and futures trading as an arm of the wider Binance organization.

Kraken: Kraken is one of the few exchanges that offer margin trading and is licensed within the United States. Kraken users can access up to 5x margin on over 36 tokens on Kraken.

Huobi: Users on Huobi can speculate on digital currencies using the Spot Exchange, Margin Exchange, Futures Market, Options and USDT-Swaps with leverage up to 125x.

Derebit: Derebit allows traders to take advantage of up to 100x on Bitcoin and Ethereum futures that can be traded with leverage.

Kucoin: Kucoin supports trading a huge range of cryptocurrencies and is one of a few platforms that allows US users to have a margin account for trading cryptocurrencies.

The tax implications of crypto margin trading

So now that we’ve explained just how crypto margin trading works, it’s time to dig into the possible tax implications of the process.

In crypto margin trading, you have several different parts of the process that may or may not be taxable events, depending on the rules and regulations in the region you are a taxpayer.

Crypto margin trading in Australia

To determine what time of tax treatment your crypto margin trading will have in Australia, you’ll first have to decide whether your activities are on an individual level or a business level. If you are acting as an individual, any gains, losses, fees etc will incur capital gains tax. If you are acting as a business entity, these same actions will incur business income tax. We recommend working with an accountant to determine what segment your activity comes into.

Crypto margin trading in the US

In the US, any gains or losses made from margin trading crypto will be subject to capital gains tax, in alignment with the IRS’ positioning as crypto as a property asset. Similarly, if you swap a crypto asset you made via margin trading for a different crypto asset, the IRS may see this too as a taxable event. We recommend talking to a tax professional to determine what’s best for your personal circumstances.

Crypto margin trading in the UK

The HMRC has not yet released any guidelines on how crypto margin trading will be treated from a tax perspective. In line with their treatment of other cryptocurrency activities, there is the potential that margin trading gains/losses will be treated with income tax if the owner is a business entity, or capital gains tax if the owner is an individual. We recommend talking to an accountant to determine what’s best for your personal circumstances.

Crypto margin trading in Canada

As is the situation in the UK, the CRA has not yet released any guidelines on how crypto margin trading will be treated from a tax perspective. In line with their treatment of other cryptocurrency activities, there is the potential that margin trading gains/losses will be treated with income tax if the owner is a business entity, or capital gains tax if the owner is an individual. We recommend talking to a tax professional to determine what’s best for your personal circumstances

How can Crypto Tax Calculator help you track your margin trading activity?

As you can imagine, if you’re an avid margin trading, there’s the possibility that you will accumulate hundreds, if not thousands, of transactions related to your trading activity. This can be an overwhelming task to track manually - which is where we come in!

We have 500+ integrations readily available for our users, so that you can import your data into our platform. Once that’s done, our software will categorize the majority of your transactions for you - as buys, sells, swaps, and anything in between. This means that as a margin trader, your transactions will be categorized accordingly so that your final balances of short or long term gains and/or losses, or income, are accurate.