Understanding Taxes on Crypto Margin Trading
Curious about how taxes work for crypto margin trading?
In this overview, we’ll break down the essentials of taxes on crypto margin trades and show you how to quickly file them with the IRS!
What Exactly Is Margin Trading?
Margin trading in crypto means borrowing funds from a platform or broker to boost your trading power. It’s a high-stakes move that can magnify both your wins and your losses.
Picture this: You’ve got 2 BTC valued at $50,000. On a platform offering 4x leverage, you could borrow up to $200,000 using your BTC as collateral. But, if the trade flops and you dip below the platform’s minimum threshold, your collateral might get wiped out in a liquidation.
Trading on Margin is risky, it provides both significant upside and downside potential.
How Does Taxation Work for Margin Trading and Crypto?
The IRS hasn’t dropped a clear rule book for crypto margin trading yet, but we can piece it together by looking at how stocks and similar assets are taxed.
Most likely, your profits or losses from margin trades will fall under capital gains and losses, just like regular crypto sales.
The basic math?
Subtract your cost basis (what you paid) from your gross proceeds (what you got). How you figure those numbers depends on whether you’re up or down on the trade.
How Do I Report Profits?
Made money on a margin trade?
That’s a capital gain you’ll need to report.
Example: Scoring a Profit
• Marcus borrows $8,000 worth of XRP using leverage.
• He pays $150 in interest to borrow it.
• Marcus sells the XRP for $14,000.
Here, Marcus nets $6,000 in profit ($14,000 – $8,000). On his taxes, he’d report $6,000 as gross proceeds and $0 as basis since it’s all borrowed funds.
The $150 interest?
He can list that as an investment expense on Form 4952 and deduct it on Schedule A if eligible.
What About Losses on Margin Trades?
If the trade goes south, you’ve got a capital loss to report.
Example: Taking a Hit
• Priya borrows $3,000 worth of Litecoin.
• The value drops to $2,200.
• Priya sells to cut her losses.
Her gross proceeds are $0 (no profit here), and she reports a $800 loss ($3,000 – $2,200) as her cost basis, reflecting the borrowed funds.
How Do Short Positions Fit In?
Shorting crypto on margin follows the same logic.
Here’s a quick scenario:
Shorting Gone Wrong
• Leo shorts 3 Solana (SOL), borrowing and selling them for $600.
• SOL’s price climbs to $750.
• Leo buys back the SOL to close the position.
Leo’s out $150 ($600 – $750). He reports $0 proceeds and a $150 cost basis to show the loss.
What Happens When My Collateral Gets Liquidated?
If your trade tanks so hard that the platform liquidates your collateral, that’s still a taxable moment. You’ll calculate a gain or loss based on how your collateral’s value shifted since you got it—even if you don’t pocket the cash.
Example: Liquidation Blues
• Nadia puts up 1 BTC, bought for $40,000, as collateral.
• Its value falls to $35,000.
• The exchange liquidates it.
Nadia takes a $5,000 capital loss ($40,000 – $35,000).
