How Are DeFi Crypto Loans Taxed?
DeFi platforms offer unique opportunities for investors to loan their crypto assets and earn passive income, as well as borrow using their assets as collateral. But these transactions may have big implications come tax time. Let's look at what those might be.
How are DeFi crypto loans taxed?
DeFi is so new that most tax offices haven’t actually got around to issuing specific guidance on it just yet.
Instead, investors need to carefully study their existing crypto tax laws to understand how their DeFi cryptocurrency activities may be viewed from a tax perspective. For this reason, it’s always advisable to speak to an experienced accountant to ensure you’re compliant.
In general, though, your crypto transactions will always be seen one of two ways from a tax perspective. Either you’re earning an income, and you’ll pay Income Tax, or you’re making a capital gain, and you’ll pay Capital Gains Tax.
Examples of earning an income include:
Being paid in crypto for a service.
Mining crypto.
Staking rewards.
Airdrops (in some countries).
Examples of making a capital gain include:
Selling crypto for fiat currency.
Swapping crypto for another crypto.
Spending crypto on goods or services.
Gifting crypto (in most countries).
So while there’s no clear guidance on DeFi crypto lending taxes, there is plenty of guidance on how similar transactions would be viewed from a tax perspective. This is easiest to understand when we break down each individual transaction in a crypto loan.
How is lending crypto taxed?
Lending crypto on DeFi platforms may be subject to either Income Tax or Capital Gains Tax, depending on the exact platform you’re using and how it works.
When you loan crypto, you put your asset into a lending pool. This in itself would not trigger a taxable event; you’re not earning, and you haven’t gotten rid of your asset and made a capital gain.
However, if you receive a coin or token to represent your share of the lending pool, like an aToken on Aave, this may trigger a taxable event. Many tax offices may view this as swapping crypto for another crypto, which would be subject to Capital Gains Tax.
Of course, the aim of the game when lending crypto is to earn interest on it. Again, how this is taxed will depend on how your specific DeFi platform works.
If you’re earning new tokens as a reward, like COMP tokens, this would be seen as income and subject to Income Tax.
How is borrowing crypto taxed?
What about tax from the other end of the spectrum: do you need to pay taxes when you’re borrowing crypto?
Like the above, this breaks down into several different transactions that we already have some guidance on from a tax perspective.
When you take out a crypto loan, you might need to put up collateral for the loan. Provided you didn’t receive a token representing your collateral, this wouldn’t be a taxable event.
You’ll pay interest on the crypto you borrow in most instances. Paying interest in fiat currency is not a taxable event. Paying interest in crypto may be subject to Capital Gains Tax, and it could be viewed as disposing of your crypto. If you’re taking out a loan for personal use, loan interest is not tax-deductible.
However, in some instances, like if you’re viewed as operating a crypto business, then taking out a loan for a commercial purpose, this loan interest could even be tax-deductible. Similarly, if you’re operating as a day trader and you’ve borrowed for investment purposes, like yield farming, loan interest could be viewed as an investment interest expense, which is tax-deductible.
What about the funds you borrow? Well, it all depends on what you borrow and how you use it.
If you’ve borrowed crypto to further invest, any of these investments will follow the same crypto tax rules that already exist. So if you’re selling, swapping, or spending crypto, any gains would be subject to Capital Gains Tax.
Similarly, if you’re borrowing crypto to increase your yields through margin trading, any realized gain at the point you close your position would be subject to Capital Gains Tax.
How Koinly helps
Lending and borrowing crypto? Koinly calculates your crypto taxes for you - whatever crypto investments you’re making. Check out our help article for detailed information on how Koinly calculates crypto loans.
All you need to do is import your transactions from your crypto wallets and let Koinly do the rest. It’ll calculate your income, capital gains and losses, and expenses for you. You can find all this information in an easy-to-read summary on your tax report page, as well as specific tax reports to download and submit to your tax authority.
