Wondering how your cryptocurrency loan is taxed?
are hard to navigate for even seasoned investors. Because crypto is a new asset class, the IRS has yet to provide clear guidance on some common transaction types, including loans. Cryptocurrency taxes
In this guide, we’ll share everything we currently know about how cryptocurrency loans are taxed — whether you are using a centralized or decentralized provider. We’ll also explain some gray areas in the tax code and break down different approaches to reporting your loans.
Cryptocurrency loans explained
Some investors hold a large portion of their net worth in crypto assets. Though they may need to withdraw some of their holdings for personal use, they are reluctant to sell their cryptocurrency and incur a taxable event.
Instead of selling their assets, investors often use their cryptocurrency as collateral to take out a loan. This way, they can receive money for personal use without selling their crypto-assets.
Where can I take out a crypto loan?
Currently, cryptocurrency loans are offered by both centralized platforms like
, BlockFi , and Celsius as well as decentralized protocols such as Compound. For more information, check out our Nexo . guide to crypto loan providers Are crypto loans taxable?
Loans have long been considered non-taxable by the IRS. It’s reasonable to assume that for the most part, cryptocurrency loans will be treated the same way.
However, there are certain unique situations where taking out a crypto loan may incur a taxable event.
Gray areas in the tax code
Some decentralized protocols use crypto-to-crypto swaps to facilitate loans. For example, if you use ETH as collateral for a platform like Compound, you will be given cETH in return.
In the past, the IRS has said that crypto-to-crypto swaps are a taxable event. However, it’s not clear whether this transaction would fall into the same category.
Because this is a gray area in the tax code, some investors choose a conservative approach to reporting these types of loans on their tax returns, while others opt for a more aggressive approach.
Conservative approach: Treat the swap as a taxable event. Incur or capital gains depending on how the value of your collateral has changed since you originally received it. capital losses Aggressive approach: Treat this swap as a non-taxable loan and do not report it on your tax return. Are crypto loans considered tax-deductible?
While the IRS has not put out guidance on whether crypto loan interest payments are considered tax-deductible, it’s likely that they’ll be treated similarly to traditional loans.
If a business takes out a loan, interest payments can be considered a tax-deductible business expense.
If a loan is taken for personal reasons, interest payments are typically not considered tax-deductible. Examples of this include using loan proceeds to pay for tuition, groceries, or car payments.
In most circumstances, the interest paid from taking out an investment loan is tax-deductible. For example, should an investor use the money they receive from a loan and allocate it for investment purposes, the interest expense would be considered investment interest expense and is deductible up to your total investment income in a tax year.
However, it’s important to note that any profits you make from investment loans will be taxed as capital gains or personal income, depending on the specific nature of the transaction.
How are crypto loan liquidations taxed?
Some protocols may liquidate your collateral if the value drops substantially. In this case, this is considered a disposal event and you will face a tax liability even if you do not receive the proceeds of the sale.
How are self-repaying crypto loans taxed?
Protocols like Alchemix offer ‘self-repaying loans’. These protocols deposit your collateral in yield generation protocols to generate income and repay your loan over time. In this case, your loan repayments will likely be considered debt cancellation income and trigger an income tax liability.
An easy way to report your cryptocurrency taxes
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