Crypto margin trading in the U.S.: Your guide for 2025
Sep 23, 2025・9 min read
While buying and selling cryptocurrencies directly (spot trading) can lead to impressive gains, some traders look for ways to amplify their positions even further.
For those who understand risk management, margin trading offers a more capital-efficient way to gain extreme exposure to coins and tokens.
However, due to increasing regulatory oversight, margin trading has become more restricted in the United States, and access is limited on many exchanges. Even for those who qualify, margin trading carries significant loss potential if traders aren’t fully aware of the risks.
In this guide, we’ll break down the current state of crypto margin trading in the U.S. to help you decide whether it’s right for you.
Please note: Margin trading is for experienced traders. Do not margin trade without first understanding cryptocurrency, regular spot trading, and the tax implications of these transactions.
What is margin trading?
Margin trading expands on traditional spot trading because it allows traders to borrow funds to increase their position size. Unlike in the spot market, margin traders don’t rely solely on the capital available in their accounts. Instead, they borrow funds from a centralized exchange (CEX) or decentralized finance (DeFi) trading platform, using collateral they deposit (their "initial margin").
Exchanges that support margin allow users to increase their market exposure through leverage trading. Depending on their exchange’s margin guidelines, traders can increase their position size by 2x, 10x, or even 100x, depending on their risk tolerance. While leverage makes margin trading more capital-efficient, it also magnifies losses when the crypto market moves against them. For this reason, margin trading is only suitable for traders who fully understand its risks.
How does margin trading work?
When a trader first opens a margin account, they must deposit the exchange's minimum required balance as their initial margin. Next, they borrow funds from an exchange or a lending platform to use as collateral. This allows them to take on larger position sizes depending on the available leverage ratios, which increases their profit potential and downside risk.
For example, a 2x leverage ratio doubles a trader's collateral value, or, more specifically, an account with $10,000 in initial margin is worth $20,000 in the crypto market. While this results in a margin trader's position going up 2x when a cryptocurrency moves in their favor, it also means it drops at the same doubled rate when the price moves against them. To avoid losing collateral, margin traders must be extra vigilant about their positions and keep a few rules in mind:
Maintenance margin
To keep a leveraged position open, traders must always maintain a minimum level of collateral, known as the maintenance margin. If market volatility causes the collateral value to drop too low, traders receive a margin call and must deposit additional funds to restore their account to the exchange's required maintenance level. Failing to meet margin requirements in time results in "liquidation," where the exchange forcibly sells off the trader's assets to cover the borrowed amount.
Margin interest and fees
Even if a margin account meets the required maintenance margin, traders typically must pay "margin interest" to borrow funds. Since margin functions like a debt obligation, anyone using this method should expect their exchange to charge interest and factor these costs into their risk-reward analysis. The longer a trader holds a margin position open, the more interest accrues, which is why margin trading is often associated with short-term strategies.
For tax purposes, margin interest is classified as an "investment interest expense" and is deductible up to a trader's net investment income amount, subject to special tax rules. For example, suppose a trader earns $3,000 in net investment income but incurs $4,000 in margin interest fees (investment interest expenses) while generating these gains. They can only deduct $3,000 of investment interest expense on her tax return, with the remaining $1,000 carried forward to future years. The trader can deduct this $1,000 when they have additional net investment income in the future.
The deductible amount is calculated using IRS Form 4952. Once determined, this amount flows to Schedule A, Line 9 (for casual investors) or Schedule C (for professional traders).
Capital gains or losses on liquidations
While it may seem like a forced liquidation qualifies as a capital loss, that's not always the case. If the collateral is liquidated after a margin call at a higher fair market value (FMV) than its cost basis, it could result in a capital gain. In these situations, traders may owe taxes on their margin trading activity, even though they incurred a loss due to liquidation.
To understand why, it's important to remember that taxpayers calculate capital gains and losses by subtracting the cost basis of a cryptocurrency from the sale price. If a trader’s initial margin appreciates in value before liquidation – meaning it’s worth more than when they first acquired it – the liquidation is considered a taxable disposition, just like selling crypto for USD.
Before entering a margin position, traders should always carefully consider the cost basis for each coin they deposit in their account and compare it to the current liquidation threshold. To make this task more manageable, tax software tools like CoinTracker help keep records of cost basis and FMV for every cryptocurrency in a trader's portfolio. If the liquidation price exceeds the cost basis, traders may owe capital gains tax – even if they took a loss on their margin position.
What is going short and long in margin trading?
Besides capital efficiency, another benefit of margin trading is the ability to take bets on both sides of a crypto trade. Instead of simply buying a cryptocurrency and hoping for the value to increase ("going long"), with a margin account, traders could also "go short.” Shorting cryptocurrencies means traders profit when their chosen asset declines in value. Although short sellers expose themselves to unlimited downside risk if a cryptocurrency keeps rising, going short provides a way to take advantage of price volatility and preserve the cost basis of long positions (hedging).
For example, if a trader holds Ethereum (ETH) in a crypto wallet but expects an upcoming market correction, they could use a margin account to open a short position on ETH and profit from the near-term decline. The gains from their short position would offset the recent losses in their ETH holdings, which would bring their average cost per coin down as they wait for a rebound.
Isolated margin trading vs. cross-margin trading
Traders have two ways to allocate their collateral – and, by extension, manage their risk profile – in a margin account: isolated margin and cross margin.
In an isolated margin account, the collateral for each specific trade is separate from the rest of the trader's account balance. In other words, traders only allocate a portion of their margin for specific digital assets, and liquidation only affects the margin assigned to that particular position.
For example, if a trader opens a 3x leveraged long position in Solana (SOL) with $5,000 in isolated margin, the maximum risk is limited to that $5,000. Even if the trader's account has additional funds in other cryptocurrencies, the $5,000 is only at risk if the Solana trade moves against them and the collateral falls below the maintenance margin.
Conversely, cross-margin accounts allow traders to spread their collateral throughout their entire account. This means if one trade turns out poorly, they can use additional funds from the total collateral to prevent liquidation. This is often a valuable strategy for hedging positions and maintaining flexibility when managing margin calls, but it puts traders at risk of greater losses if multiple positions work against them. While cross-margin trading can help prevent margin calls, it also puts the entire account at risk of liquidation if several trades fail.
2025
Crypto Tax
Guide is here
CoinTracker's definitive guide to Bitcoin & crypto taxes provides everything you need to know to file your 2024 crypto taxes accurately.
Benefits and challenges of crypto margin trading
Crypto margin trading has its appeal, but it’s often considered better suited for experienced traders who understand the risks. Cryptocurrencies already experience volatile intraday swings, and adding leverage increases the risk of significant losses if traders aren’t fully prepared for market fluctuations, margin calls, and liquidation risks. Here’s a closer look at at the pros and cons of crypto margin trading:
Benefits of crypto margin trading
- Capital efficient: Traders only need to deposit the minimum initial margin to access a larger pool of funds. This feature allows those with high conviction but limited capital to execute their strategies more effectively.
- Higher returns with leverage: One of the biggest draws of margin trading is the potential for amplified gains compared to traditional spot trading. When trades go in an investor’s favor, they reap significantly higher returns.
- Market flexibility: Margin accounts give traders the ability to long or short digital assets, allowing them to profit from market corrections and hedge long-term portfolios.
Challenges of crypto margin trading
- Liquidation risk: Margin trading is lucrative when traders are on the right side of the market – but dangerous when they’re not. A single bad move can trigger margin calls and collateral liquidation.
- Time-sensitive: Margin trading requires constant market monitoring. Traders who aren’t used to tracking price movements daily may struggle with the high-stakes, fast-paced nature of this strategy.
- Complexity: Unlike simply buying and storing cryptocurrencies, margin trading requires a firm grasp of several key crypto concepts such as maintenance margin, leverage ratios, and liquidation thresholds.
Is margin trading better than regular crypto trading?
Since every crypto trader has different skill levels, goals, and risk tolerances, there's no definitive answer as to whether margin trading is better than spot trading. However, there's no question that margin trading carries significantly higher risk.
With a spot trading account, traders only lose their entire portfolio if the cryptocurrency they hold drops to zero. By contrast, margin trading introduces borrowed funds and leverage, meaning traders can lose their collateral even if the asset still holds market value. In other words, there’s a point at which a margin trader’s account can be wiped out, even if the cryptocurrency they’re trading hasn’t hit zero.
While experienced traders who are comfortable with day trading and risk management strategies stand to gain more on margin, the potential for greater gains and rewards comes with a catch. Anyone considering margin trading should take the time to understand its intricacies and learn risk-mitigation tools like stop-loss orders to reduce the likelihood of liquidation.
Taxation of margin trading
Trading cryptocurrencies on margin follows similar tax protocols to buying and selling digital assets on a spot exchange. Generally, traders who profit from margin trades have to pay capital gains taxes, while those who lose money can claim deductions. However, as mentioned above, the IRS considers a cryptocurrency's cost basis whenever calculating capital gains or losses.
If an exchange liquidates a trader’s position and the cryptocurrency’s value is higher than its cost basis at the time of sale, the IRS treats it as a taxable capital gain – even if the trader suffered a loss due to liquidation. Traders must report these gains and losses on Form 8949 and Schedule D during tax season.
As of Jan. 1, 2025, the IRS defaults to the Specific Identification (Spec-ID) and "first in, first out" (FIFO) methods for reporting crypto transactions. Spec-ID allows traders to choose which purchase prices from their transaction history to use for their cost basis. FIFO automatically assigns the earliest recorded cryptocurrency purchase as the cost basis at the time of disposal. While other accounting methods – such as "highest in, first out" (HIFO) – exist, traders must specify their preferred method in advance if they intend to use an approach other than FIFO.
Another important tax consideration in margin trading is interest paid on borrowed funds. While margin interest is tax-deductible, it's subject to special tax rules. Remember, the allowable deduction for margin loan interest cannot exceed a trader's net investment income.
Tips for crypto margin trading
Rushing into something new – especially when money is at stake – is rarely a good idea. For those serious about margin trading, adopting risk-management techniques early on can help minimize the risk of losses and build confidence.
Try paper trading
A smart way to ease into margin trading is to open a simulated or paper trading account. Some crypto platforms offer demo accounts where traders can experiment with real-world tools while using an imaginary balance. Since there's no real capital on the line, paper trading accounts give traders a chance to learn from their mistakes and develop strategies without any risk.
Use risk management tools
Knowing how to proactively manage risk is what separates reckless traders from the pros, and that includes defining the parameters of a trade from the start, including the expected profit and potential loss. Smart traders also plan their exit strategies and use "take-profit" and "stop-loss" orders to exit a position automatically. Highlighting key price levels early and setting up sell orders helps reduce the risk of liquidation.
Research technical analysis
Instead of studying the fundamentals of a cryptocurrency project, many margin traders focus on its technical analysis, which includes reviewing chart patterns, volume levels, and areas of support and resistance.
Additional tools like Bollinger bands and the Relative Strength Index (RSI) give traders more insights into recent crypto trading activity to better anticipate where prices are headed. Not only does technical analysis sort out the probability for future price action, but it also helps define precise levels to get in or out of a trade before entering a margin position.
Start small
As tempting as it might be to go full throttle with 100x leverage right away, it's far safer to start with lower leverage, such as 2x or 3x, especially while getting familiar with margin trading. High leverage can amplify gains, but it also significantly increases risk, making liquidation more likely if the market moves against you.
A more cautious approach is to start with moderate leverage and focus on established cryptocurrencies like Bitcoin (BTC) or Ethereum (ETH) – both tend to have greater liquidity and be less volatile than smaller altcoins.
Also, as a general rule, traders should always use only funds they’re comfortable losing, whether trading on margin or not.
Monitor margin trading with a CoinTracker account
However you trade crypto, CoinTracker has you covered.
CoinTracker's Portfolio Tracker connects to hundreds of exchange APIs and wallets, capturing real-time data on all your crypto transactions. With CoinTracker, you'll gain detailed real-time insights into your profits and losses, along with auto-generated, IRS-compliant tax forms.
See how easy CoinTracker makes crypto tax reporting – get started with a free account today.
Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.