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Taxes On Cryptocurrency Margin Trading

Cash rules everything around me

C.R.E.A.M., get the money

Dollar dollar bill, y’all

Cash rules everything around me

C.R.E.A.M., get the money

Dollar dollar bill, y’all

-C.R.E.A.M, Wu Tang

Buying on margin is borrowing money from a broker in order to purchase stock. You can think of it as a loan from your brokerage. Margin trading allows you to buy more stock than you’d be able to normally. Did you know that you can do margin trading with cryptocurrency? I guess it may be time to start singing “Crypto Rules Everything Around Me!” You know that the IRS will want their piece of the action. Therefore, it is very important to know the tax implications of margin trading with cryptocurrency. Section 1256 Contract is a type of investment defined by the Internal Revenue Code (IRC) as a regulated futures contract, foreign currency contract, non-equity option, dealer equity option, or dealer securities futures contract. Each contract held by you at the end of the tax year is treated as if it was sold for its fair market value, and gains or losses are treated as either short-term or long-term capital gains. However, margin trading using cryptocurrency is not recognized by the IRS and does not fall under Section 1256 Contracts, so there is no special tax treatment for such trades.

Think of margin trading with cryptocurrencies as taking out a loan from a bank to invest in property. If you make any gains/losses when you sell the property they will be classified as capital gains and will need to be reported. For margin trades, the ‘selling’ happens when you close a position. Any gains made at that point will be realized capital gains and reported in the same way as regular trades. The exchange that you are using may have a liquidation clause on margin trades. This means that the exchange can sell your collateral (in this case cryptocurrency) if the value of your borrowed funds falls below the value of your collateral. This type of liquidation will result in a capital gains tax.

Most margin traders are trying to make a profit as quickly as possible. Therefore margin traders are constantly making short-term capital gains and losses, and thus they are subject to the short-term capital gains tax. Margin traders with a long term plan and simply hold their cryptocurrency can qualify for long-term capital gains rates. Always remember that long term capital rates are lower than the short term. It is very important to consider the tax implications of your margin trading strategy. There are clearly pros and cons for every strategy.


Let’s say you think Bitcoin will go up — you borrow $10,000 from a bank and buy one Bitcoin that is trading at $10,000. Then you waited five months. At the end of five months, you have one Bitcoin and you owe $10,000 plus interest at the end of five months. Let’s say Bitcoin is now trading at $15,000 — you sell the Bitcoin and now you have $15,000 in cash but you owe $10,000 plus interest to the bank. You pay back your $10,000 loan, you pay the interest, and you keep the change. You will owe a capital tax on the profit.

Margin trading cryptocurrency is one of the riskiest bets you can take. Both Cryptocurrency investing and margin trading are extremely risky. This risky combination reminds me of when I once mixed an energy drink with vodka! Okay, that was a crazy comparison but I needed to check if you were still awake. Please don’t play with your hard-earned money by doing margin trading unless you have done research. By research, I’m talking about more than simply reading a few online social media posts about margin trading. Also, don’t forget to have a conversation with your tax accountant before making any trades.

Need help with your crypto taxes? Well, contact Jamaal "Crypto J" at!





Twitter: 36cryptotaxes

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