Tax on Crypto Margin Trading

Zac McClure
ByZac McClure, MBAReviewed byTynisa (Ty) Gaines, EAUpdated on September 18, 2023 · minute read
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  • The act of crypto margin trading is not taxable.

  • However, any capital gains/ losses or interest income derived from margin trading or lending is subject to tax.

Crypto margin trading is, essentially, crypto trading with borrowed money. Users can borrow funds from a crypto exchange or from other users of the exchange in order to take on larger positions than they could with their own assets. Thus, margin trading in and of itself is not taxable because borrowing crypto is not a taxable event. However, if you earn proceeds from margin trading or lending, it is most likely taxable. Read on for more information.

Taxes on crypto margin trading 

Depositing collateral for a crypto loan is not considered a taxable event. However, margin traders will be responsible for 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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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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