What taxes are involved when you trade crypto on margin? Crypto margin trading is available at some of the most popular crypto exchanges, offering up to 10x leverage, while futures trading could go as high as 125x.
What is the appeal of crypto margin? With leverage trading, you can have much higher profits than trading spot markets but also much higher potential losses. If you have a risk lover profile, margin trading may be a good option, even though it is more suited for professional traders.
Today, we explore what taxes you pay when you trade crypto on margin, how crypto futures are taxed, how to deduct margin interest, and more.
In this article:
Taxes on crypto margin trading
In the US, trading crypto-to-FIAT or crypto-to-crypto is a taxable event. Trading crypto on margin is still selling crypto for FIAT or another cryptocurrency, which means it is also a taxable event in the US.
So, what is the difference between spot and margin trading?
The potential of gains and losses differ between crypto margin trading and spot trading due to the use of leverage.
Crypto margin trading is a taxable event in the US, subject to capital gains taxes. Here’s how you account for taxes on crypto margin trading:
Determine the fair market value (in USD) of the cryptocurrency you’re selling;
Calculate the capital gain/loss on the trade;
Pay long-term or short-term capital gains taxes on the profit.
Do you pay taxes on a crypto margin trade? An example
Let’s say you have $1,000 and want to buy bitcoin on a 10x margin. You go to your favorite crypto exchange, and you buy essentially the same as $10,000 worth of BTC (10x leverage). In January 2021, 1 bitcoin was worth $30K. You bought 0.33 BTC. In March 2021, bitcoin went to $50K, and you decided to sell.
The same 0.33 BTC were then worth $16,500. Your cost basis was $1,000, and the sales proceeds were $16,500, but you need to repay the loan. You repay the $10,000 and receive the gain of $6,500. Since you sold before holding for less than 12 months, you’ll be taxed at a short-term capital gains setting, between 10% to 37% depending on your situation.
Can you deduct margin interest from your capital gains?
In the US, if the margin interest is deducted from your sales proceeds, similar to a trading fee, you can use it to lower your capital gain. You can effectively reduce your capital gains taxes by deducting margin interest with this option.
Following the example above, let’s say you had a capital gain of $6,500, but due to the use of leverage, you ended up paying 0.0001 BTC for interest. The Fair Market Value of that 0.0001 BTC when you closed the trade was $5 (0.0001 BTC* $50,000). You can now subtract that margin interest of $5 from the $6,500 gain. In this case, your effective gain would be $6,495.
However, if margin interest is charged separately (i.e., not as part of a margin trade), it’s considered investment interest. For individual investors, it can only be used to offset passive investment income, such as interest or dividend income, and you can only take the interest expense deduction if you claim an itemized deduction on your tax return.
How are crypto Futures trading taxed
In the US, trading crypto futures leads to the same tax treatment as margin or spot trading, taxed at the capital gains level.
If you trade futures, the only difference from the example above is that your gain or loss could be higher due to increased leverage.
However, if crypto futures are treated the same as stock futures, their tax treatment would not be the same as for a regular crypto trade. Futures are taxed using the 60/40 rule: 60% are taxed at the long-term capital gains tax rate, while only 40% of your short-term capital gains are taxed at your ordinary income tax rate.
How to report crypto margin trades on taxes?
Every crypto margin trade needs to be reported on your taxes. Here’s how to report leveraged crypto trading, including margin and futures, on your taxes:
Determine the Fair Market Value (in USD) of the cryptocurrency you’re selling and the sales proceeds with the help of a crypto tax software like CoinTracking;
Calculate the capital gain/loss on your leveraged trade;
Deduct any margin interest from the respective trade, if charged against the trade;
Report your gain/loss on your tax return and pay the appropriate capital gains taxes if you have a profit.
Learn how to import your margin trades into CoinTracking by API:
The best crypto margin tax calculator: CoinTracking
The best crypto tax software to import and track your margin trades is CoinTracking.
You can import your trades using CSV or API, track your gains/losses, and generate tax reports according to your preferred accounting method.
Beyond crypto margin trading, CoinTracking is your full crypto tax solution for:
DeFi and NFT support with our ETH+DEX importer.
25+ advanced reports, including which coins offer you a tax-free rate.
Automatic capital Gains, according to 12 accounting methods (e.g., FIFO, LIFO, HMRC, ACB), accepted worldwide.
Generating complete Tax Reports in your country.
Crypto margin trading with no errors: CoinTracking Full Service in the US.
CoinTracking also offers a Full Service for US traders. A crypto reconciliation tax expert from Polygon Advisory Group, a leading US crypto tax firm, will review your CoinTracking account, help fix any errors, and ensure you submit your crypto tax reports error-free.
Do you have any crypto tax questions? Check the best guides:
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NFT Taxes: The Complete Guide.
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This post is part of the Crypto Taxes AMA series. Follow our weekly AMAs on Twitter where our expert CPA, Sharon Yip answers your crypto tax questions. You can download 30+ AMA crypto tax reports for free.
Disclaimer: All the information provided above is for informational purposes only and should not be considered as professional investment, legal, or tax advice. You should conduct your own research or consult with a professional financial advisor when investing.