More so, several Crypto-related activities such as making a purchase with digital coins, exchanging digital currencies, and cashing out cryptocurrencies are taxed. Thus, it is reasonable to be curious about crypto lending too.
Before taking a look at the tax benefits of Cryptocurrency, let’s consider the tax rules governing digital currencies first.
The Internal Revenue Service (IRS) considers digital currencies as property, not currency. Thus, transactions made by virtual currencies are under the same tax principle that applies to property transactions.
Going further, the body makes it clear that a businessman who accepts digital currencies as payment for goods or services is under obligation to include the market value of the coin when calculating their gross income.
Thus, when a taxpayer makes a purchase with digital currency, the transaction will be taxed on the short or long term, depending on the duration the asset was held. The individuals or organizations involved in such transactions should report it on Form 8949. The Sales and Other Dispositions of Capital Assets form are used by individuals and corporations to report their capital losses and gains to the Internal Revenue Service.
To make shed light on tax involving Cryptocurrency, the IRS released a list of taxable transactions and non-taxable transactions for crypto-related transactions.
In the former category are:
- Cashing out digital currencies or exchanging them for fiat money. You will be taxed based on the value of profits you make from the sale.
- Exchanging one digital currency for another.
- Buying and HODLing a digital currency. IRS doesn’t recognize a gain or loss for holding a cryptocurrency.
- Paying for goods and services with cryptocurrency. If you pay for goods and services with a digital currency, that is a taxable event. The tax is determined by the value of the cost of the goods or services in dollars.
- Receiving forked or mined digital currencies.
In the latter group are:
- Using fiat money to purchase cryptocurrency.
- Giving a third party a cryptocurrency gift. If you receive a digital currency gift, it is not a taxable event. However, once you sell the gift, the sale attracts a tax.
- Staking or lending your coins. When lending your digital coins, the IRS believes you are not making a profit from it. Thus, it exempts it from tax.
- Inter-wallet cryptocurrency transfer. You can transfer your crypto between two accounts without being taxed for that.
- Donating cryptocurrency to charity or tax-exempt non-profit organization. This is especially true if you make a Cryptocurrency gift to a charitable organization in the 501 (C) (3) category. These are organizations that are exclusively established for charitable purposes such as scientific, religious, educational, literary, cruelty prevention for children and animals, testing for public safety, and what have you.
- Cryptocurrency received from blockchain forks, mining, airdrops, and others.
IRS considers crypto received from staking, mining, airdrops, and lending as regular income. You are under obligation to report such in your annual tax return. On the other hand, Crypto sales should be reported in the capital gains report.
A capital gain refers to the profit you make from selling a capital asset such as bonds, stocks, and digital assets, among others. Some crypto-related transactions are not considered to offer financial rewards. Hence, they don’t fit into the capital gain category.
More so, investors who are HODLing over $10,000 worth of digital currency in foreign exchange should report their assets according to the Foreign Account Tax Compliance Act (FATCA) and Foreign Bank Account Report (FBAR).
Considering the government’s stance on different cryptocurrency usages, what’s IRS’ stance on cryptocurrency loan?
How are Cryptocurrency Loans Taxed?
Currently, the IRS doesn’t consider a fiat loan taken against cryptocurrency collateral as taxable. In their opinion, this is synonymous with taking a loan with your asset as collateral.
When you take such a loan with your home as collateral, IRS doesn’t consider the house as being sold. Thus, you won’t be subject to the traditional capital gains that a house sale attracts. In essence, you are not required by law to pay taxes on the loan.
This is irrespective of the house’s value during the loan period. You won’t pay a dime as a tax even if the asset appreciates significantly during the loan’s lifespan.
The same principle applies crypto-backed loans, including Cryptocurrency loans. Don’t forget that the IRS treats virtual currencies as property with respect to tax purposes. Thus, using your digital currency as collateral for any type of loan exempts you from tax obligations
A typical example is that of Edgar Fernandez. The former Wall Street trader narrated that he took a loan of about $100,000 with his Bitcoin serving as collateral. By taking the loan, he could keep his digital currency as well as being exempt from paying capital gains tax on the loan.
This example explains the IRS’ stance on digital currencies that it sees as capital assets such as property and stocks, rather than as a currency. However, note that you will incur capital gains and pay tax if your collateral is liquidated.
IRS’ stance on Cryptocurrency loans is beneficial for Crypto loan borrowers or those who take crypto-backed loans. It is a great way to raise capital for a project without being indebted to the taxman.
Since borrowers don’t make a profit from a crypto loan or a crypto-backed loan, IRS views such loans as non-taxable events. How does the tax exemption on Crypto loan benefit you?
The non-taxable attribute of a crypto loan is a huge blessing for borrowers. Taking such a loan is a smart move that saves you from the huge tax you may pay on the digital asset if you decide to cash it out.
If you invested about $10,000 on Bitcoin when it was just $1000 and you want to cash it out when your estimated Bitcoin worth is $50,000, you will pay a huge tax on the digital asset if you cash it out, especially if you make a profit from the sale.
Rather than take that path, you can raise money without paying heavily as you would if you cash out. Take a crypto loan.
Taking a crypto loan costs you less in interest than the tax you will pay if you withdraw the digital currency and exchange it for fiat money. Your tax rate is a determinant of the HODL duration. Thus, you may be taxed under the short-term gains or the long-term gains categories. Each category has some predefined tax rates.
For instance, if you hold the coin for a year or less before selling it, you will be taxed under the short-term gain. This type of gain attracts the highest rate: 37%. On the other hand, if you decide to cash it out after a year, you will attract less tax as you fall under the long-term gains category which may be up to 20% in 2018.
Let’s go back to the analogy above. Your $10,000 Bitcoin investment that is currently estimated to be worth $50,000 gives you a profit of $40,000.
If you hold it for more than a year before selling it out, IRS will tax you 37% of that profit. That’s some $14,800 tax, over one-third of your entire profit. On the other hand, most crypto lending exchanges charge less than 15% interest. If you take such a crypto loan, you may end up paying less than half of the $14,000 as an interest in the loan. Thus, you save some $8,000 you would have paid as tax.
The proliferation of crypto lending exchanges assures you that you won’t run out of options if you wish to take a loan rather than withdraw your digital asset and exchange it for fiat money.
How does Cryptocurrency Loan Work?
Prospective crypto borrowers can choose from a wide range of platforms that provide decentralized lending services. They accept several digital currencies as collateral with each exchange setting its requirements.
Nevertheless, Nuo Network offers Cryptocurrency enthusiasts crypto loans at reasonable interest rates.
On this exchange, you can instantly borrow ERC20 tokens or ETH provided you meet the collateral requirements set by the decentralized trading platform. Nuo currently supports DAI, ETH, 8 ERC20 tokens, and others.
Users are allowed to take short or long term loans. They have the freedom to specify their tenure and interest rate, Nuo’s way of ensuring that borrowers get nothing but the best experience while taking loans from their platform.
Secured transactions are guaranteed with the exchange’s Smart Contract technology while the transactions are also verifiable on-chain to enhance their transparency and boost your trust in the cryptocurrency lending platform.
As a borrower, you initiate the process by signing up on the exchange. Then, create a loan request by specifying the loan amount, duration, interest rate, and other important details.
Support your request by providing the requested collateral to enable you to take a loan of your choice, long or short term.
Cryptocurrency loan offers borrowers tons of benefits. Besides the privilege of raising funds without going through the stress of conventional financial institutions and banks, it also cuts down your taxes considerably.
Take advantage of this opportunity on the Nuo Network. Secure a loan from the decentralized exchange and reap the tax benefit.
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