Many people focus only on the returns when doing arbitrage in finance, but they overlook a key issue—the tax.

Let's first look at the situation in the United States. The IRS classifies profits from crypto arbitrage as "capital gains," which means you have to pay taxes. How much depends on your holding period. If the entire process from borrowing, investing, to repayment is completed within one year, the gains are taxed at short-term capital gains rates, with a maximum of 37%. If you hold the asset for more than one year before completing the arbitrage, then it’s taxed at long-term capital gains rates, with a maximum of 20%. The difference is quite significant.

So here’s a suggestion: keep detailed records of every arbitrage transaction—when it was done, how much was involved, and how much was earned. This isn’t just to make things complicated for yourself; it’s really useful, especially when it’s time to file taxes.

But policies vary around the world. In some regions, the tax rules for crypto arbitrage are not yet clearly defined, which requires participants to be more cautious, actively follow policy developments, and avoid regret when regulations become clearer.

If you are involved in cross-border arbitrage, things get even more complicated. Different countries have tax treaties, and the choice of arbitrage routes directly affects your tax burden. Understanding these treaties and planning your operations accordingly can truly reduce costs. Earning more doesn’t necessarily mean earning the most; earning legally and compliantly is the smarter approach.