Crypto Loans: A Tax Guide

What are crypto loans?

Crypto loans work very similarly to traditional USD/fiat loans. The creditor puts his or her crypto holdings to work by locking them into interest-earning platforms such as Celsius. The debtor, on the other hand, can use his or her crypto as collateral to borrow other assets.

Why take out crypto loans?

The interesting change which we see in the move from traditional loans to crypto loans is the difference in interest rates. A Bank of America credit card might run you an annual percentage rate of 14-24%, while a Bitcoin loan from BlockFi is about 5%. This is a massive difference for borrowers. Coupled with crypto’s mass-adoption, it is likely that this will become more normalized. Normalization can only benefit creditors.

Why give out crypto loans?

Individuals may take the position of the giver, rather than the borrower. Through crypto loans, you can help people get the money they need without having to wait in a long queue like they would at a traditional bank. Instead, you and the borrower sign a smart contract which explicitly states the terms of the loan (amount, payments, APR, etc). This contract is processed through the blockchain, which means that there is no third party- and thus less profits lost.

In addition, lending out your coins offers a level of stability in your investments. Crypto volatility is notorious for swinging in either direction, at any time, for any reason. Crypto loans allow you to utilize stable coins like USDT, which is pegged to the US dollar, in order to give you a solid base in your portfolio which you can fall back on.

I TOOK crypto loans. How am I taxed?

In the US, most crypto trading qualifies as a taxable event. On the other hand, simply borrowing money is not a taxable event. Because you are taking out crypto loans and not investments, then you are not taxed.

If you use crypto loans to buy more crypto, however, things get a lot more complicated. You will have to pay taxes on your bought crypto, as well as interest, since these all count as taxable events. Because of the complexity of this situation, it is best to connect with a tax professional before making such decisions.

When it comes time to pay off your loan, you also don’t have to worry about taxes.

I GAVE crypto loans. How am I taxed?

When you loan out crypto, there are usually two ways in which you are rewarded:

Interest Earnings: The lending platform you use pays you interest on whatever crypto you loaned. This means that if you gave them Bitcoin to loan out to borrowers, then you will receive interest as Bitcoin. Because this is interest income, the IRS will see this increase in your Bitcoin holdings as ordinary income. It is treated no differently than income which you earn from your job.

Capital Gains: Many DeFi platforms choose instead to issue their own tokens. These tokens are called Liquidity Pool Tokens (LPTs), and they usually take form because the platform structures its adding/removing of liquidity as a token swap. You earn the LPT from providing crypto loans, and you can later trade your LPT for crypto of your choice. This is taxed as capital gains/loss.

If your earnings fall into the capital gains territory, things can become a bit confusing. If you do not trade your LPTs for a different crypto within a tax year, does it still count as capital gains? Or is it treated as simply buying and holding a new cryptocurrency? If your crypto loan isn’t paid back in full, how does that affect things?

In these situations, it is best to connect with a professional .This way you can speak with him or her about any issues you are facing or questions which you might have. Set up a free consultation with a professional as soon as possible.

Are interest payments tax-deductible?

If a business takes out a loan for its general conduct, then interest is treated as a tax-deductible business expense. However, the IRS does not extend the same ruling on personal loans. You cannot deduct purchases of personal items or services, such as electronics or lawncare, through crypto loans. However, if an individual uses a crypto loan to purchase assets which produce investment income (such as real estate), then the IRS sees this as tax-deductible.

Make your life easier with YokeTax

At YokeTax, we only hire the best of the best. Certified tax professionals with a minimum of 20 years experience, who are always keeping up to date on the changes in the tax code and how it affects you, are at your command. Set up a free consultation to get a personalized look at your financial situation. Be it crypto loans or estate planning, let us handle the numbers.