Crypto Margin Trading: Your Ultimate Guide 2024

Zac McClure
ByZac McClure, MBAReviewed byTynisa (Ty) Gaines, EAUpdated on February 21, 2024 · minute read
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  • Margin trading with crypto involves leveraging borrowed money to increase trading positions. Crypto margin trading allows traders to amplify potential gains by borrowing funds, but it comes with significant risks, including forced liquidation.

  • While margin trading itself isn't taxable, capital gains, losses, and interest income from trading or lending are subject to taxation for US taxpayers.

Cryptocurrency trading has evolved, offering investors various strategies to maximize their potential gains. One such strategy gaining popularity is crypto margin trading. In this comprehensive guide, we'll delve into the intricacies of margin trading with crypto and explore how it works, its benefits and risks, the fees involved, top platforms, and key tips for success.

What is crypto margin trading?

Margin trading with crypto involves leveraging borrowed money to increase trading positions, allowing users to take on larger positions than their own assets would permit. This strategy enables traders to magnify profits, although it comes with increased risk potentially.

Here are our experts’ top three picks of crypto margin trading platforms. Later in this article, we give a list of our top five choices with reviews and pros and cons so you can quickly find a platform to suit your goals and level of experience.

Binance

Binance

Best for diverse crypto margin trading options

Bybit

Bybit

Best for high-leverage trading

Coinbase Pro

Coinbase Pro

Best for a reputable, user-friendly experience

How does crypto margin trading work?

Traders can borrow funds from crypto exchanges or other users, utilizing margin accounts that offer extra funds based on initial deposits. Leverage ratios determine the borrowed funds' scale in relation to the trader's capital. This enables traders to control larger positions with less capital, potentially leading to higher returns.

Long vs. short margin trading

Margin trading not only allows betting on rising markets (long) but also profits from falling prices (short), providing traders with strategic flexibility. Traders can capitalize on both upward and downward market movements, enhancing their ability to profit in various market conditions.

Leverage ratios

Understanding leverage ratios is critical, as they dictate the scale at which gains and losses are magnified, influencing risk and reward. While higher leverage ratios offer the potential for greater profits, they also increase the risk of significant losses. Traders must carefully choose leverage based on their risk tolerance and market analysis.

Margin levels, margin calls, and liquidation

Effective risk management requires navigating margin levels, responding to margin calls, and avoiding liquidation. Margin levels indicate the percentage of a trader's funds being used for open positions. If losses approach the borrowed funds' value, a margin call is issued, requiring additional deposits to cover potential losses. Failure to meet a margin call may lead to forced liquidation, where the exchange closes the position to limit further losses.

Isolated margin trading vs. cross-margin trading

Isolated margin trading confines risk to specific trades, while cross-margin trading utilizes the entire account balance to prevent liquidation. Traders should choose the most suitable option based on their risk appetite and overall trading strategy, and always do their own research and understand the risks involved before they buy crypto.

Is margin trading better than regular trading?

While margin trading offers the potential for higher returns, it comes with increased risk and complexity. Traders should weigh the advantages and disadvantages carefully, considering their risk tolerance, market knowledge, and overall investment goals.

Benefits and risks of crypto margin trading

Here is a quick breakdown of the benefits and risks of margin trading with crypto.

Benefits of crypto margin trading

  • Potential for higher returns through leverage.

  • Access to larger trading positions with a smaller capital investment.

  • Flexibility to profit in both rising and falling markets.

Risks of crypto margin trading

  • Magnified losses due to leverage.

  • Increased complexity, not suitable for beginners.

  • Interest costs associated with borrowed funds.

Fees for crypto margin trading

Understanding the fees involved in margin trading is crucial. These may include trading fees, interest on borrowed funds, and other charges. Traders should carefully evaluate the fee structures of different platforms to choose the most cost-effective option.

5 best platforms for crypto margin trading

Here are our experts’ choices of the five best crypto margin trading platforms available on the market today.

Binance

Best for diverse crypto margin trading options

Binance is the world’s leading crypto exchange, which offers a wide range of digital assets to trade. With a user-friendly interface, it caters to both beginners and experienced traders. While primarily known for spot trading, Binance provides a robust margin trading platform that allows users to access leverage for various cryptocurrencies.

BitMEX

Best for cryptocurrency derivatives

BitMEX is a well-established platform specializing in cryptocurrency derivatives trading, particularly futures and perpetual contracts. It is renowned for offering high-leverage options and catering to advanced traders. The platform has gained a notable reputation in the industry for its innovative features and focus on derivatives.

Bybit

Best for high-leverage trading

Bybit is a specialized platform focused on cryptocurrency derivatives trading, offering perpetual contracts with high leverage. With an intuitive trading platform and high liquidity, Bybit is favored by traders looking for advanced features in the derivatives market.

Coinbase Pro

Best for a reputable, user-friendly experience

Coinbase Pro, the professional trading platform of Coinbase, offers a secure and user-friendly environment for margin trading. Backed by a reputable company, it provides an excellent starting point for beginners entering the world of margin trading with crypto. Coinbase Pro supports a diverse range of cryptocurrencies.

Kraken

Best for diverse crypto options and futures

Kraken is a well-established cryptocurrency exchange known for its security features and a wide range of supported cryptocurrencies. It offers crypto margin trading in the USA with leverage and includes futures trading options, providing users with a comprehensive set of tools for both spot and derivative trading.

Best tips for crypto margin trading and risk management

Here are our top tips for those beginning in margin trading with crypto, both to manage risk and succeed.

Continuous learning

  • Understand crypto margin trading, and stay informed about market trends and news.

  • Utilize technical analysis to inform trading decisions.

  • Research the available crypto trading pairs, trading platforms, and trading options.

Start small

  • Begin with low leverage to mitigate risk.

  • Increase leverage gradually as you gain experience.

Risk management

  • Set clear risk limits for each trade.

  • Use stop-loss orders to limit potential losses.

Always do your own research before engaging in any activity in crypto, and understand the risks involved.

Taxes on crypto margin trading 

Depositing collateral for a crypto loan is not considered a taxable event. However, margin traders in the United States and many other regions are responsible for crypto taxes on any capital gains earned with the borrowed funds. Losses in margin trading can offset net capital profits. These gains and losses should be reported on Form 8949

If you lose assets through a margin call/forced liquidation, this is also considered a taxable disposition and will impact your crypto tax reporting. You will recognize capital gains or losses on that crypto even though you did not receive the proceeds. The rate you'll pay depends on your income bracket and how long you held the asset.

Any interest or fees you paid for margin trading can be added to your asset’s cost basis. 

Margin trading fee example

  • Brian borrows $10,000 of USDT on Binance and uses it to buy 3 ETH, which is trading at $3,333.

  • When ETH is trading at $4,000, he sells the asset for $12,000, and returns the $10,000 of USDT to the exchange.

  • Brian will owe capital gains taxes on his profit. However, because he paid $750 in interest, that can be deducted from his taxable gains amount.

  • This means he will owe taxes on $1,250 of gains. 

Taxes on crypto margin lending

Users who lend funds to margin trading platforms earn interest on their deposit. This interest is taxed as income and reported on the Form 1040. 

Margin trading income example

  • Katrina deposits $10,000 of BTC into BitMEX Earn

  • She earns $600 of interest.

  • This $600 will be taxed as ordinary income.

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Crypto margin trading FAQs

Here are answers to frequently asked questions about crypto margin trading, crypto margin trading in the USA, cryptocurrency trading, and Bitcoin margin trading.

Is crypto margin trading safe?

Crypto margin trading carries inherent risks due to the amplified potential for both gains and losses. It requires a thorough understanding of the market and risk management strategies. Utilize reputable platforms, stay informed, and start with caution to enhance safety.

Is crypto margin trading in the USA legal?

The legality of crypto margin trading in the USA varies by state and is subject to regulatory changes. Ensure compliance with local laws and use platforms that adhere to regulatory standards.

Can I margin trade Bitcoin?

Yes, Bitcoin is commonly traded with leverage in crypto margin trading. Numerous platforms offer Bitcoin margin trading, allowing users to amplify their exposure to price movements.

Where can I make Bitcoin margin trades?

Several exchanges offer Bitcoin margin trading, including popular platforms like Binance, BitMEX, and Coinbase Pro. Choose a reputable exchange with a track record for security and reliability.

What's a margin call and what triggers it?

A margin call occurs when a trader's losses approach the borrowed funds' value. It prompts the need for additional deposits to cover potential losses. Margin calls are triggered by adverse market movements that jeopardize the initial deposit.

Is margin trading crypto a good idea?

Margin trading can be a lucrative strategy if executed with caution and a solid understanding of the market. However, as with most things in crypto, margin trading involves risk. Evaluate your risk tolerance, stay informed, and consider looking for advice from financial professionals before undertaking crypto margin trading. When it comes time to deal with crypto taxes from crypto margin trading, our crypto tax professionals are available to assist.

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Zac McClure
Zac McClureCo-Founder & CEO at TokenTax
Zac co-founded TokenTax after his career in international finance and accounting at JPMorgan, Imprint Capital and Bain. He has worked in more than half-dozen countries and received his MBA from the UPenn Wharton School.
Tynisa (Ty) Gaines
Reviewed byTynisa (Ty) GainesTax Expert at TokenTax
Tynisa (Ty) Gaines, EA has more than 20 years of experience as a tax professional. Ty has published numerous tax articles, two tax e-books, and an academic publication on cryptocurrency for the National Income Tax Workbook.

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