Crypto borrowing can provide liquidity without triggering capital gains taxes Platform risk is significant, multiple major lenders have gone bankrupt Monitor loan-to-value ratios closely to avoid unexpected liquidation events Consult a financial advisor to evaluate whether crypto borrowing fits your situation

Curated by: Rubric Advisors

Tax Planning

Crypto Borrowing

Crypto borrowing allows cryptocurrency holders to use digital assets as collateral for loans, providing liquidity without triggering a taxable sale, but comes with significant risks including liquidation, platform failures, and smart contract vulnerabilities.

Crypto Borrowing

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What is Crypto Borrowing

Use cryptocurrency as collateral to borrow cash or stablecoins without selling
Avoid triggering a taxable event while still accessing liquidity
Available through both centralized platforms and decentralized (DeFi) protocols
Typically requires over-collateralization due to crypto price volatility

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What is Crypto Borrowing

Use cryptocurrency as collateral to borrow cash or stablecoins without selling
Avoid triggering a taxable event while still accessing liquidity
Available through both centralized platforms and decentralized (DeFi) protocols
Typically requires over-collateralization due to crypto price volatility

Platform Landscape Today

Centralized options include Coinbase, Gemini, and other regulated platforms
Several major CeFi lenders (BlockFi, Celsius, Voyager) failed in 2022, counterparty risk is real
DeFi protocols like Aave, Compound, and MakerDAO operate via smart contracts
Always verify platform solvency, regulatory status, and insurance coverage

Loan Terms and Structure

Loan-to-value (LTV) ratios typically range from 20% to 50% of collateral value
Interest rates vary widely, compare across platforms before committing
Loans may be interest-only with principal due at maturity, or fully amortized
Origination fees and withdrawal fees can add meaningfully to total cost

Liquidation Risk Management

If collateral value drops, platforms issue margin calls requiring more collateral
Automatic liquidation occurs when LTV exceeds the platform threshold (often 75-85%)
High crypto volatility means liquidation can happen quickly during market crashes
Maintain extra collateral buffer and monitor positions actively to avoid forced selling

DeFi-Specific Considerations

Smart contracts eliminate intermediaries but introduce code vulnerability risk
Protocol hacks and exploits have caused billions in losses across DeFi platforms
No customer support or dispute resolution, transactions are irreversible on-chain
Some protocols offer governance token rewards that can partially offset borrowing costs

Key Takeaways

Crypto borrowing can provide liquidity without triggering capital gains taxes
Platform risk is significant, multiple major lenders have gone bankrupt
Monitor loan-to-value ratios closely to avoid unexpected liquidation events
Consult a financial advisor to evaluate whether crypto borrowing fits your situation

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The information above is for educational purposes only and does not constitute investment advice, a recommendation, or a solicitation to buy or sell any security. Any historical figures are for illustration only, and past performance does not guarantee future results. Tax laws, regulations, and contribution limits change frequently, the details here may become outdated. Individual circumstances vary. Consult a qualified financial advisor, CPA, or attorney for guidance specific to your situation. Rubric Advisors is registered with the California DFPI; registration does not imply a certain level of skill or training.

Crypto Borrowing

What is Crypto Borrowing

Platform Landscape Today

Loan Terms and Structure

Liquidation Risk Management

DeFi-Specific Considerations

Key Takeaways

What is Crypto Borrowing

Platform Landscape Today

Loan Terms and Structure

Liquidation Risk Management

DeFi-Specific Considerations

Key Takeaways

Related Topics

Cryptocurrency Fundamentals

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Crypto Borrowing

What is Crypto Borrowing

Platform Landscape Today

Loan Terms and Structure

Liquidation Risk Management

DeFi-Specific Considerations

Key Takeaways

What is Crypto Borrowing

Platform Landscape Today

Loan Terms and Structure

Liquidation Risk Management

DeFi-Specific Considerations

Key Takeaways

Related Topics

Cryptocurrency Fundamentals

Digital Estate Planning: Managing Your Online Legacy

529 Plan Tax Strategies