Are Crypto Loans Taxable? Borrowing and Liquidations

The appeal of borrowing against crypto is straightforward: you get liquidity without selling, and without selling there is no disposal and no tax. That is broadly right, and it is also where the analysis usually stops, which is why people are surprised by what happens next.

Taking the loan

Receiving loan proceeds is generally not income, because you have an obligation to repay. Pledging crypto as collateral is generally not a disposal, because you have not transferred beneficial ownership, you have granted security.

Both of those depend on the arrangement actually being a loan. Read what the platform does with your collateral. Terms that permit the lender to use, lend on or rehypothecate the collateral push toward an argument that ownership moved, and an arrangement that transfers ownership outright with a promise to return equivalent assets is a different transaction from one that takes security over assets that remain yours.

Liquidation is a disposal

This is the item that is not ambiguous and is nonetheless routinely missed.

When your collateral is liquidated, it is sold. A forced sale is a sale. You realise gain or loss measured against your basis in the units liquidated, and short term treatment applies at ordinary rates up to 37% if held one year or less, with 0%, 15% or 20% beyond that.

The scenario that catches people is a liquidation on collateral that had appreciated a great deal. You lose the position, you receive nothing, and you have a taxable gain, because the gain accrued over the whole holding period and the liquidation is what realised it.

Repaying with appreciated crypto

If you borrowed a stablecoin and repay it with the same stablecoin, there is little to say. If you repay a crypto denominated loan using coins that have appreciated since you acquired them, you have used those coins to settle an obligation, and using crypto to pay for something is a disposal. This shows up most often in DeFi where the borrowed asset and the repayment asset are volatile.

DeFi receipt tokens

Lending protocols typically issue a token representing your deposit. Whether depositing into the protocol and receiving that token is itself a disposal is the same unsettled question that liquidity pool deposits raise. There is no authority resolving it specifically. Take a defensible position, apply it consistently, and keep records that support either treatment.

Interest earned on lent crypto, whether paid in tokens or accrued into a rebasing balance, is income at its value on receipt, and that value becomes your basis in those units.

Interest you pay

Whether interest paid on a crypto loan is deductible depends on what the borrowed funds were used for and on your circumstances, and personal interest is generally not deductible. Investment interest and business interest have their own rules and limits. This is fact specific and worth confirming rather than assuming.

What to record

• Loan origination, amount, asset, and the collateral pledged with its units and basis.
• Every collateral top up and withdrawal.
• Every liquidation, partial or full, with the units, the price and the timestamp. Partial liquidations are easy to miss because the position survives.
• Interest paid and received, with values at the time.
• Repayment, including which units were used.

Our DeFi tax guide covers lending protocols and receipt tokens, and US crypto tax covers the rates a liquidation gain lands at.

General information, not tax advice. Rules change and depend on your circumstances. Confirm the current position with the relevant tax authority or a qualified tax professional.

Practical Steps for Managing Crypto Loan Tax Records

When you borrow against crypto, the tax treatment can be straightforward at the start, but the details matter later. The key is to keep a clear record of every step, from the moment you take the loan to the final repayment. This means noting the date and time of each transaction, the type and amount of crypto involved, and the market value at that moment. For collateral, record which specific units you pledged, including their original purchase price and the date you acquired them. This helps you track your basis, which is essential for calculating any gain or loss if the collateral is sold or liquidated. Also, keep a log of any additional collateral you add or withdraw, as these events can affect your tax position. If you receive interest in crypto, record its value on the day you receive it, as that becomes your new basis for those coins. Similarly, if you pay interest, note the value of the crypto used to pay it. By maintaining this detailed log, you can avoid the confusion that often arises when you need to report your transactions. It also makes it easier to identify any gaps in your records early, so you can address them before you need to file.

Identifying Unanswered Questions in Your Loan Arrangement

Before you rely on any assumption about the tax treatment of your crypto loan, it is wise to identify the questions that remain unanswered. For example, the article notes that receiving loan proceeds is generally not income, but this depends on the arrangement being a true loan. Ask yourself: does the platform have the right to use or rehypothecate your collateral? If so, the transaction might be viewed differently. Similarly, when you deposit crypto into a lending protocol and receive a receipt token, it is unclear whether that deposit is a taxable event. There is no definitive answer, so you need to decide on a reasonable position and document your reasoning. Another question is whether interest you pay is deductible. This depends on how you use the borrowed funds and your personal situation. You cannot assume it is deductible; you must check the rules that apply to your case. By listing these uncertainties, you can focus your research or seek advice on the points that truly matter. This proactive approach helps you avoid surprises later, especially if the tax authority interprets the transaction differently than you did.

Reconciling Your Records with Platform Statements

Once you have gathered your transaction records, the next step is to reconcile them with the statements from the platforms you used. This is important because platforms may report transactions in different ways, and some may not provide a complete picture. For example, a platform might show your loan balance and interest accrued, but it may not break down the exact units of crypto used for each repayment or liquidation. You need to cross-check your own log against the platform's data to ensure every transaction is accounted for. Pay special attention to partial liquidations, which can be easy to miss because your position continues. Also, verify the timestamps and prices, as these affect the value of your gains or losses. If you find discrepancies, investigate them promptly. It could be that the platform uses a different valuation method, or that you missed a transaction. By reconciling your records, you can be confident that your tax report is based on accurate and complete information. This also helps you identify any missing data, such as the cost basis of coins acquired long ago, which you may need to estimate or research.

Documenting Assumptions and Defensible Positions

In areas where the tax treatment is unclear, you need to make assumptions and take positions that are defensible. The article highlights that the treatment of DeFi receipt tokens is unsettled. In such cases, you should choose a method and apply it consistently. For example, you might decide that depositing into a protocol is not a disposal, because you retain beneficial ownership. Or you might treat it as a disposal if the protocol has the right to use your assets. Whatever you choose, write down your reasoning and keep it with your records. This documentation is valuable if your return is ever questioned. Similarly, for interest paid, if you believe it is deductible, you should document how the borrowed funds were used and why you think the deduction applies. You should also note any advice you received from a tax professional. By documenting your assumptions, you show that you made a good-faith effort to comply with the tax rules. This can help in an audit, as it demonstrates that you did not simply ignore the issue. Remember, the goal is to be reasonable and consistent, not to take an aggressive position that could be challenged.

Reviewing Before Filing and Knowing When to Seek Help

Before you finalize your tax return, take the time to review your entire crypto loan history. Check that you have included all taxable events, such as liquidations and repayments with appreciated crypto. Make sure your calculations are correct, and that you have applied the right treatment to each transaction. If you are unsure about any aspect, it is wise to consult a qualified tax professional who understands crypto. They can help you navigate the complexities and ensure you are not missing anything. The article itself notes that the rules change and depend on your circumstances, so getting personalized advice is often worth the cost. A professional can also help you document your positions and prepare for any questions from the tax authority. Remember, this article provides general information, not tax advice. Your situation may be different, and the law may have changed. By reviewing your records carefully and seeking expert help when needed, you can reduce the risk of errors and penalties. This is especially important if you have had multiple loans, partial liquidations, or complex DeFi interactions. A thorough review gives you peace of mind and helps you stay compliant.

Organizing Your Crypto Loan Records

When you borrow against crypto, the tax treatment can be straightforward at the start, but the details matter later. The key is to keep a clear record of every step, from the moment you take the loan to the final repayment. This means noting the date and time of each transaction, the type and amount of crypto involved, and the market value at that moment. For collateral, record which specific units you pledged, including their original purchase price and the date you acquired them. This helps you track your basis, which is essential for calculating any gain or loss if the collateral is sold or liquidated. Also, keep a log of any additional collateral you add or withdraw, as these events can affect your tax position. If you receive interest in crypto, record its value on the day you receive it, as that becomes your new basis for those coins. Similarly, if you pay interest, note the value of the crypto used to pay it. By maintaining this detailed log, you can avoid the confusion that often arises when you need to report your transactions. It also makes it easier to identify any gaps in your records early, so you can address them before you need to file. Once you have gathered your transaction records, the next step is to reconcile them with the statements from the platforms you used. This is important because platforms may report transactions in different ways, and some may not provide a complete picture. For example, a platform might show your loan balance and interest accrued, but it may not break down the exact units of crypto used for each repayment or liquidation. You need to cross-check your own log against the platform's data to ensure every transaction is accounted for. Pay special attention to partial liquidations, which can be easy to miss because your position continues. Also, verify the timestamps and prices, as these affect the value of your gains or losses. If you find discrepancies, investigate them promptly. It could be that the platform uses a different valuation method, or that you missed a transaction. By reconciling your records, you can be confident that your tax report is based on accurate and complete information. This also helps you identify any missing data, such as the cost basis of coins acquired long ago, which you may need to estimate or research.