Planning in advance to prepare for your cryptocurrency tax liabilities is crucial to ensure that you report your taxes accurately and pay the least amount of taxes as legally possible.
You need to ensure that you are not only properly reporting your transactions in the correct character and format and that your accounting calculations are accurate and verifiable but also that you have used every legal strategy available to you to minimize the taxes on your cryptocurrency gains.
Decentralized finance has quickly grown and it’s future is very bright . It’s important that you understand the tax implications of Decentralized Finance activities. Here we will cover tax implications for cryptocurrency loans.
Cryptocurrency loans are a valuable consideration for any tax plan due to the advantages it offers to retain your holding period and tax deferral opportunities. If you borrow using cryptocurrency as collateral without receiving a different token in return you don’t realize any tax on that transaction since you did not sell your cryptocurrency you just put it up as collateral. This will also allow you to maintain your holding period for your position in this asset if you are planning to hold it for long term capital gains rates.
It is important to understand that you cannot sell or exchange the collateral that you put up. On some platforms you can put up one cryptocurrency as collateral but then receive back a different cryptocurrency. This is a taxable event and should be avoided if tax deferral is your goal.
If you are on the other side of the transaction and lending cryptocurrency in return for interest income payments, you will have an income tax liability associated with this. If the lending platform pays earnings directly from interest then this will be treated as ordinary income for tax purposes.
If the lending platform uses liquidity pool tokens and pays earnings by issuing their own token you may recognize a capital gain for this activity. This is because when you add to a liquidity pool your liquidity pool tokens will increase but not the asset balance that you are lending. Then when you convert your tokens back to the original asset, the cost basis will be subtracted from the proceeds you receive to arrive at your capital gain.
Taxpayers should very carefully consider all the cryptocurrency tax factors while participating in any cryptocurrency transactions. It is important to consult with an experienced cryptocurrency CPA regarding your specific portfolio and/or business.
Here at Camuso CPA, we offer cryptocurrency tax services nationwide. Our team is highly experienced in cryptocurrency as one of the first CPA firms working in the space since 2016. We were the first CPA firm to accept cryptocurrency as a form of payment during 2017. Contact our team today to discuss your portfolio in detail here.