Investors and traders have always juggled with long and short positions to speculate on price movements of assets. This strategy, rooted in traditional financial markets, is highly relevant in the world of cryptocurrencies too. Veering towards the long position, one buys a cryptocurrency, anticipating a value surge over time. On the contrary, going short embodies the sale of a cryptocurrency (even if not owned) assuming a price cut and then buying it back at a lower affordable cost to profit from price dips.
Subtleties lie in the nuances of starting a long or short position. When one anticipates a price increase, they initiate a long position by acquiring an asset. In contrast, a short position is begun by dispensing an asset (usually one that was borrowed) with the hope that its price will plummet. Traders employ these strategies, tailoring them to the highly erratic nature of digital assets, capitalising on opportunities in both bullish and bearish markets.
Nevertheless, the process of going long or short in cryptocurrency entails sequential steps. It begins with careful research and analysis of the chosen cryptocurrency, considering factors like its technology, growth prospects, market drifts, historical data, and scope of acceptance. On selection of a reliable crypto exchange or trading platform, users set up an account and transfer funds into it. Post this, one places a buy or sell order, which on execution either initiates a long or a short position. Individuals have to monitor market trends closely after this and decide on an exit strategy to close their trading position.
High-risk high-reward scenarios are inherent to both long and short positions. Long positions offer substantial earnings if succeeded by appreciable price escalations. Nevertheless, the peril of market unpredictability coupled with potential losses are undisputable. Similarly, short positions offer monetary gains when betting on price depreciations but aren’t spared from substantial risks owing to market volatility and sudden price surges.
Tax implications present yet another sphere of complexity. Gains from long positions are often viewed as capital gains in many countries and may attract capital gains taxes when sold. Different tax rates apply to short-term and long-term gains. On the other hand, short positions could pose peculiar tax challenges. Borrowing and selling a cryptocurrency short may not immediately be taxable in some countries, as the short position is not closed until the borrowed asset is bought back. Consequently, the trader may experience capital gains or losses upon closing a short position.
In conclusion, understanding and conforming to the local tax laws holds cardinal importance, as treatment of cryptocurrency gains and losses can vary radically from one place to another. Furthermore, meticulous record-keeping and reporting are imperative to maintaining tax compliance in the dynamic world of cryptocurrencies.
Source: Cointelegraph
