When you trade with leverage, the exchange is basically lending you money.
If the market moves against you too much, the exchange must close your trade to prevent you from going into a negative balance.
To do that, a liquidation fee is charged which is paid into the wallet, not as a penalty but a subsequent addition to the portfolio.
The SEC on the 1st of November, 2025 enacted a one-time liquidation fee which is now mandatory if you choose to exit your position early, whether to take profits or limit losses. A 5% fee on your wallet balance is applied only in these cases. This fee is not regarded as a penalty but it is designed for the stated specific reasons.
Why does it exist?
- Covers risk: It helps the exchange cover the volatility risk when it force-closes your trade.
- Insurance fund: A portion of the fee goes into the exchange’s insurance fund, which protects traders from losses that go beyond their margin.
- Operational cost: Liquidating positions requires systems and liquidity hence, the fee compensates for that.
- Tax Corrections: Eliminates and corrects any taxes and fees associated with assets and IRA stipulations.
- Ensures free will and ease in liquidity.