How Are Crypto Loans Taxed in the US?
Taking a crypto-backed loan is not taxable income, but the IRS taxes liquidation, crypto repayment and lending interest on your federal return for most people.
Vahe HakobyanEditor-in-chief
Updated Oct 6, 20263 min readFact-checked
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- Losing collateral to liquidation is a taxable sale of that crypto.
- Repaying a crypto loan with crypto can create capital gain or loss.
- Interest paid may be deductible if the loan funds investments.
- Interest earned from lending crypto is ordinary income when received.
The tax result follows what you do with the crypto, not the platform label. The IRS applies the same property rules to a centralized company and a DeFi protocol. You report the result on your federal income tax return, and the IRS asks a digital assets question on Form 1040 for most individuals.
Are Crypto Loans Taxable Income?
When you take a crypto-backed loan, the IRS treats the amount you receive as borrowed money, not as income. You have not sold the collateral, so no capital gain or loss happens then. The IRS says income from digital assets is taxable, but loan proceeds are not income.
When Do Repayment and Liquidation Trigger Tax?
Two events usually create tax. A liquidation is a sale of the collateral you lose. A repayment made with crypto is a disposal of the coins you hand over. For personal or investment crypto, the result is capital gain or loss; business or inventory crypto may produce ordinary income. You need your cost basis to figure the gain or loss.
How Is Crypto Lending Interest Taxed?
Interest moves two ways. If you pay interest to borrow crypto, the deduction depends on how you use the loan proceeds. If you lend crypto through a platform and earn interest, that interest is ordinary income when you receive it. The IRS says income from digital assets is taxable and must be reported.
- Interest paid for personal expenses is generally not deductible.
- Interest paid to fund investments may be deductible as investment interest.
- Interest paid for a business may be deductible as business interest.
- Interest earned from lending crypto is ordinary income when received, even if you reinvest it.
Frequently asked questions
The IRS applies the same property rules to both. The tax result turns on what you do with the crypto.
It does not change the result. You still dispose of the coins you hand over, and your cost basis determines the gain or loss.
Yes. The interest is taxable when you receive it, and the new coins get a cost basis.
No. Receiving loan proceeds is not income, and holding collateral without a sale or disposition does not create a taxable event.
