Getting a fiat loan against your appreciated cryptocurrency is a great way to cash out without paying capital gains taxes. In this post, let’s dissect various transactions associated with a crypto-backed loan and understand tax implications.
Receiving cryptocurrency loan proceeds
Receiving cash for depositing your cryptocurrency as collateral is not a taxable event.
This is similar to getting a home equity line of credit where you collateralize your home with the bank and get cash against the appreciated property value.
For example, Sam purchased 1 bitcoin (BTC) in 2017 for $1,000. It is now worth $50,000. Sam decides to put this BTC as collateral in a lending platform and get a loan. The lending platform offers him a $30,000 loan. This $30,000 is not taxable to Sam. He doesn’t have to report this amount in any tax forms although this would trigger him to check “yes” on the virtual currency question on Page 1.
Spending the loan proceeds
Spending the cash received is not a taxable event either. You can spend the cash proceeds for anything you like. However, just know that if you don’t pay back the loan, that will lead