What is Crypto Margin Trading?
To put it in simple words, cryptocurrency margin trading is the process of trading crypto by using funds that are borrowed. Typically, the trading capital is borrowed at high rates of interest from the crypto exchange in order to access increased leverage. While it offers the borrower an opportunity to increase profits if markets improve, it also carries a certain risk of loss in case the market condition deteriorates.
How Does it vary from Regular Trading?
Regular cryptocurrency trading involves buying and selling crypto using own funds whereas, in margin trading, the funds are borrowed. It increases the user’s buying potential and they can have much higher access to any future profits. Also, the funds are borrowed against the existing funds in the trading account.
These increased funds give the trader ‘Leverage’ in terms of increased buying power. Different platforms define different thresholds for leverage that are usually expressed in the ratio of existing trading account funds.
Benefits and Risks of Margin Trading
The increased profit potential is the main benefit of the margin trading of cryptocurrency. However, in order to realize such gains, the market must move in line with the user’s expectations.
On the other hand, if the market moves in the direction that is opposite of what was predicted, then the losses will also magnify accordingly.
Crypto Margin Trading Tax Implications
In itself, cryptocurrency margin trading does not attract any tax implications as defined by the IRS. Taxation comes into picture when the trader loses or earns on a particular margin trade. This is because cryptocurrency is understood as ‘property’ for taxation purposes and only gains/losses are taxable.
Crypto Margin Tax calculation example:
Borrowings from the exchange: US $10,000 (total interest or fees = $400)
Increase with respect to the borrowings: US $15,000
The difference upon sale: US $5,000
The profit of $5,000 will attract a capital gains tax; long term or short term, depending on whether currency was held for a period of one year or less
However, before paying tax on the profit generated, the taxpayer must deduct the fees or interest on the borrowings ($10,000) from the exchange.
Therefore, the taxable gain amount will be: $5,000 - $400 = $4,600
Depending on how one handles cryptocurrency, the tax implications can vary. In all cases, it is essential to know the nature of gain or loss incurred as defined by the IRS as this is the first step to resolve any advanced crypto ta situations. It is also important to know the fair market value of the crypto being taken into consideration for taxation as this will form the underlying premise for calculation of the relevant taxes.