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February 17, 2026
Crypto Loan Tax Guide: Are Crypto-Backed Loans Taxable?
Disclaimer: This article is for educational and informational purposes only. It does not constitute tax advice, legal advice, or financial advice. Tax laws are complex, vary by jurisdiction, and change frequently. You should consult a qualified tax professional or CPA before making any decisions based on the information in this guide. Arch Lending (NMLS #2637200) is a lending platform, not a tax advisory firm.
Introduction: The Tax Advantage Most Crypto Holders Miss
If you hold Bitcoin, Ethereum, or Solana and need cash, the last thing you want is a surprise tax bill. Understanding crypto loan tax implications is one of the most financially consequential decisions a crypto holder can make -- and getting it wrong can cost tens or even hundreds of thousands of dollars.
Here is the key insight that changes the equation: borrowing against your crypto is generally not a taxable event. When you take out a crypto-backed loan, you are not selling your assets. You are pledging them as collateral while retaining ownership. Under current U.S. tax principles, no sale means no capital gains, no tax owed, and no reporting of a disposal.
This distinction -- selling versus borrowing -- is why crypto-backed loans have become one of the most popular tools for tax-efficient liquidity among serious crypto holders. In this guide, we break down exactly how crypto loan taxation works, where the IRS stands, what situations can trigger taxes, and how to structure your approach for maximum tax efficiency.
The Key Tax Advantage: Loans Are Not Sales
The foundational principle behind crypto loan tax treatment is straightforward: a loan is not a disposition of property.
Under the Internal Revenue Code, capital gains tax is triggered when you dispose of a capital asset -- meaning you sell, exchange, or otherwise transfer ownership. When you take out a loan secured by your crypto holdings, none of those things happen:
You do not sell. The crypto stays in your name.
You do not exchange. You are not swapping one asset for another.
You do not transfer ownership. The lender holds your crypto as collateral, but you remain the beneficial owner.
This is the same principle that applies to traditional securities-backed loans, home equity lines of credit, and other forms of collateralized borrowing. A homeowner who borrows against their house does not trigger capital gains tax on the home's appreciation. Similarly, a crypto holder who borrows against their Bitcoin or Ethereum does not trigger capital gains on unrealized appreciation.
Why This Matters
The difference between selling and borrowing is not a technicality. It is the difference between:
Keeping 100% of your crypto's future upside, or permanently reducing your position.
Paying $0 in taxes on the liquidity you access, or paying federal capital gains rates of up to 20% (plus the 3.8% Net Investment Income Tax, plus state taxes).
Maintaining your cost basis for future tax planning, or resetting your position at a higher basis after a taxable sale.
For anyone holding significant unrealized gains -- and given crypto's long-term price trajectory, that is most long-term holders -- this distinction is worth understanding in detail.Capital Gains Tax: What Happens When You Sell vs. Borrow
Numbers make this concrete. Consider the following scenario:
You hold 2 BTC that you purchased at $20,000 each (total cost basis: $40,000). Bitcoin is now trading at $100,000 per coin (total market value: $200,000). You need $100,000 in cash.
Option A: Sell 1 BTC
Item | Amount |
|---|---|
Sale proceeds | $100,000 |
Cost basis (1 BTC) | $20,000 |
Taxable capital gain | $80,000 |
Federal long-term capital gains tax (20%) | $16,000 |
Net Investment Income Tax (3.8%) | $3,040 |
State tax (e.g., California at 13.3%) | $10,640 |
Total estimated tax liability | $29,680 |
Cash after taxes | $70,320 |
Remaining BTC holdings | 1 BTC |
To actually net $100,000 after taxes, you would need to sell approximately 1.4 BTC, further reducing your position.
Option B: Borrow $100,000 Against Your 2 BTC
Item | Amount |
|---|---|
Loan amount received | $100,000 |
Taxable capital gain | $0 |
Federal tax | $0 |
State tax | $0 |
Total tax liability | $0 |
Cash received | $100,000 |
Remaining BTC holdings | 2 BTC (held as collateral) |
At a 60% loan-to-value ratio, your 2 BTC ($200,000 in value) supports a loan of up to $120,000. You receive the full $100,000 with no tax impact, and you keep your entire 2 BTC position.
The Real Cost Comparison
Factor | Selling | Borrowing |
|---|---|---|
Cash received | $100,000 (pre-tax) | $100,000 |
Tax owed | ~$29,680 | $0 |
Net cash after tax | ~$70,320 | $100,000 |
BTC retained | 1 BTC | 2 BTC |
Future upside on sold BTC | Lost permanently | Fully retained |
Interest cost | $0 | ~$8,490/year at 8.49% APR |
Even accounting for a full year of interest at Arch Lending's 8.49% APR, the borrowing cost ($8,490) is far less than the tax liability ($29,680) from selling. And that calculation does not even include the opportunity cost of the lost BTC. If Bitcoin appreciates another 50% over the next two years, the sold coin would have been worth $150,000 -- $50,000 in permanently forfeited upside.
IRS Guidance on Crypto Loans
What the IRS Has Said
The IRS has issued several pieces of guidance on cryptocurrency taxation, but none specifically and comprehensively address crypto-backed loans. Here is what we know:
Notice 2014-21: The IRS declared that virtual currency is treated as property for federal tax purposes. This means general tax principles applying to property transactions apply to crypto. Importantly, the principles governing loans secured by property also apply.
Revenue Ruling 2019-24: Addressed hard forks and airdrops, further establishing that crypto is treated under existing property law frameworks.
Infrastructure Investment and Jobs Act (2021): Introduced broker reporting requirements for digital assets, which took effect for the 2025 tax year. This expanded 1099 reporting but did not change the fundamental treatment of loans.
IRS FAQ and Publication 544: The IRS guidance on sales and dispositions of assets does not include collateralized borrowing as a taxable event. Pledging property as collateral -- without transferring ownership -- has never been treated as a disposition under the IRC.
What the IRS Has Not Said
Critically, the IRS has not issued specific guidance declaring that crypto-backed loans are or are not taxable events. However, the absence of specific guidance does not create ambiguity. The general tax principles are well-established:
Borrowing is not a realization event. This is a bedrock principle of U.S. tax law, not unique to crypto.
Pledging collateral is not a disposition. Posting securities as collateral for a margin loan has never been a taxable event. The same principle applies to crypto.
Loan proceeds are not income. Because a loan must be repaid, the proceeds are not considered income for tax purposes.
The Legal Landscape in 2026
Tax practitioners and legal scholars broadly agree that crypto-backed loans from centralized lenders -- where the borrower retains beneficial ownership of the collateral -- are not taxable events under current law. This position is supported by decades of analogous treatment in traditional finance.
That said, the regulatory environment around crypto is still evolving. Congress has considered various pieces of legislation that could affect crypto taxation, and the IRS continues to develop its approach. Staying informed and working with a tax professional remains important.When Crypto Loans CAN Trigger Tax Events
While taking out a crypto-backed loan is generally not taxable, several scenarios connected to crypto loans can create tax obligations. Understanding these is critical.
1. Liquidation and Margin Calls
This is the most significant tax risk associated with crypto loans. If the value of your collateral drops below the lender's required threshold and you are unable to add collateral or make a partial repayment, the lender may liquidate (sell) some or all of your collateral to repay the loan.
A liquidation is a sale. The IRS treats this as a disposition of your crypto, and you will owe capital gains tax on the difference between your cost basis and the price at which the collateral was sold.
Example: You posted 2 BTC (cost basis: $40,000) as collateral. A market downturn triggers liquidation at $60,000 per BTC. The lender sells 1.5 BTC to cover the loan. Your taxable gain is:
Item | Amount |
|---|---|
Liquidation proceeds (1.5 BTC x $60,000) | $90,000 |
Cost basis (1.5 BTC x $20,000) | $30,000 |
Taxable capital gain | $60,000 |
This is why choosing a lender with clear margin call policies and adequate notification systems matters. Arch Lending provides advance margin call notifications so borrowers have time to add collateral or make partial payments, helping avoid forced liquidation events.
2. Loan Default
If you default on a crypto loan and the lender seizes your collateral, this is treated as a disposition for tax purposes. The tax consequences are similar to liquidation -- you will owe capital gains tax based on the fair market value of the crypto at the time of seizure minus your original cost basis.
3. Transferring Ownership of Crypto to a Lender
Some DeFi lending protocols and certain CeFi arrangements may involve an actual transfer of ownership of your crypto to the lending platform. If the legal structure involves you giving up ownership rather than simply pledging collateral, this could be treated as a taxable disposition. This is one reason why the legal structure of the lending arrangement matters.
With Arch Lending's crypto-backed loans, your collateral is held in segregated custody by Anchorage Digital, a federally chartered digital asset bank. You retain beneficial ownership throughout the loan term.
4. Paying Interest with Crypto
If you pay loan interest using cryptocurrency rather than fiat currency, the payment of crypto to the lender is a disposition of that crypto. You would owe capital gains tax on any appreciation between your cost basis and the fair market value of the crypto at the time of payment.
5. Loan Forgiveness
If a lender forgives part or all of a crypto loan, the forgiven amount is generally treated as cancellation of debt income, which is taxable. This is rare in standard crypto lending but worth noting.
Summary: When Taxes Apply
Scenario | Taxable? | Type of Tax Event |
|---|---|---|
Taking out a crypto-backed loan | No | Not a disposition |
Repaying loan principal in fiat | No | Not a disposition |
Liquidation of collateral | Yes | Capital gains on liquidated crypto |
Loan default / collateral seizure | Yes | Capital gains on seized crypto |
Paying interest in crypto | Yes | Capital gains on crypto used |
Loan forgiveness | Yes | Cancellation of debt income |
Receiving loan proceeds | No | Loan proceeds are not income |
State Tax Considerations
Federal tax treatment is only part of the picture. State taxes can significantly affect the total cost of selling crypto versus borrowing.
States With No Income Tax
If you reside in one of the nine states with no state income tax (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming), the state tax component of selling is eliminated. However, borrowing still avoids federal capital gains taxes, which makes it advantageous regardless of your state.
High-Tax States
For residents of high-tax states, the advantage of borrowing versus selling is amplified:
State | Top Capital Gains Rate | Additional Tax on $80K Gain |
|---|---|---|
California | 13.3% | $10,640 |
New York | 10.9% (+ NYC 3.876%) | $8,720 - $11,821 |
New Jersey | 10.75% | $8,600 |
Oregon | 9.9% | $7,920 |
Minnesota | 9.85% | $7,880 |
For a California resident in our 2 BTC example, state taxes alone add $10,640 to the cost of selling. Borrowing avoids this entirely.
State-Specific Crypto Rules
A growing number of states have enacted or proposed crypto-specific tax regulations. Some states have introduced exemptions for certain types of crypto transactions, while others have added reporting requirements. Because the landscape varies and changes frequently, consulting a tax professional familiar with your specific state's rules is essential.
Tax-Loss Harvesting and Crypto Loans: A Combined Strategy
Tax-loss harvesting -- selling assets at a loss to offset gains -- is a well-known strategy. But it becomes even more powerful when combined with crypto-backed borrowing.
How the Strategy Works
Consider this scenario: You hold three crypto positions:
Asset | Cost Basis | Current Value | Unrealized Gain/Loss |
|---|---|---|---|
2 BTC | $40,000 | $200,000 | +$160,000 |
50 ETH | $175,000 | $150,000 | -$25,000 |
500 SOL | $15,000 | $50,000 | +$35,000 |
Without a crypto loan strategy: If you need cash, you might sell the winning BTC or SOL position and trigger a large taxable gain.
With a combined strategy:
Harvest the loss: Sell the 50 ETH at a $25,000 loss. This loss can offset $25,000 in capital gains elsewhere in your portfolio (or up to $3,000 of ordinary income per year, with the remainder carried forward).
Borrow against the winners: Instead of selling your appreciated BTC or SOL, use them as collateral for a crypto-backed loan. Access the liquidity you need without triggering the $160,000 or $35,000 in gains.
Optionally repurchase ETH: Unlike stocks, crypto is currently not subject to the wash sale rule under the IRC (though proposed legislation could change this -- consult your tax advisor). You may be able to repurchase ETH after selling at a loss. However, this area of tax law is evolving and subject to change.
Important Note on Wash Sale Rules
As of early 2026, the wash sale rule (which prevents claiming a loss if you repurchase a "substantially identical" security within 30 days) technically does not apply to cryptocurrency under the current IRC, because crypto is classified as property, not a security. However:
The IRS and Congress have signaled interest in extending wash sale rules to digital assets.
Some tax professionals advise treating crypto as if wash sale rules apply, as a conservative approach.
Proposed legislation in recent congressional sessions has included provisions to extend wash sale rules to crypto.
Consult your tax professional before executing any tax-loss harvesting strategy involving crypto.Reporting Requirements and Record-Keeping
Even though taking out a crypto-backed loan is not a taxable event, proper record-keeping is essential for tax compliance.
What to Track for Crypto Loans
Maintain detailed records of:
Loan origination details: Date, amount borrowed, interest rate, LTV ratio, collateral posted (type, quantity, and fair market value at time of posting).
Collateral movements: Any additions to or withdrawals from your collateral account, with dates and fair market values.
Interest payments: All interest paid, including dates, amounts, and whether paid in fiat or crypto. If paid in crypto, record the fair market value and your cost basis of the crypto used.
Loan repayment: Date and amount of principal repaid.
Margin calls and liquidations: If any occur, record the date, amount of collateral liquidated, sale price, and your cost basis. This is a taxable event and must be reported.
Cost basis of all collateral: Your original purchase price and date for every unit of crypto pledged. This information is critical if liquidation ever occurs.
1099 Forms and Broker Reporting
Under the Infrastructure Investment and Jobs Act, digital asset brokers are required to issue 1099 forms reporting transactions. As of the 2025 tax year:
1099-B: Brokers and exchanges report dispositions (sales, exchanges) of digital assets. A standard crypto-backed loan should not generate a 1099-B because no sale occurs. However, a liquidation event would.
1099-INT: If you earn interest on crypto deposits, this would be reported. As a borrower, you receive loan proceeds, not interest income, so this typically does not apply to borrowers.
1099-MISC: In certain situations, such as loan forgiveness or promotional bonuses, a 1099-MISC may be issued.
Record-Keeping Best Practices
Practice | Why It Matters |
|---|---|
Use crypto tax software (CoinTracker, Koinly, etc.) | Automates tracking across wallets and exchanges |
Export transaction history from exchanges quarterly | Ensures you have records even if exchange access changes |
Save loan agreements and correspondence | Documents the loan structure and collateral terms |
Track cost basis by lot (FIFO, LIFO, specific ID) | Determines your tax liability if liquidation occurs |
Keep records for at least 6 years | IRS statute of limitations is typically 3 years but extends to 6 for substantial understatements |
Interest Deductibility: Can You Deduct Crypto Loan Interest?
One of the most common questions about crypto loan tax treatment is whether the interest you pay on a crypto-backed loan is tax-deductible. The answer depends on how you use the loan proceeds.
Personal Use
If you use the loan proceeds for personal expenses (living costs, a car, a vacation), the interest is generally not deductible. Personal interest has not been deductible since the Tax Reform Act of 1986.
Investment Use
If you use the loan proceeds to make investments (buying stocks, additional crypto, or other investment assets), the interest may be deductible as investment interest expense under IRC Section 163(d). Investment interest is deductible up to the amount of your net investment income.
Business Use
If you use the loan proceeds for a trade or business, the interest may be deductible as a business expense under IRC Section 162. This could apply if you are a sole proprietor, small business owner, or independent contractor using the loan for business operations.
Real Estate
If you use the loan proceeds as a down payment on a rental property or other real estate investment, the interest may be deductible as part of your real estate investment expenses.
Key takeaway: The deductibility of crypto loan interest depends entirely on the use of proceeds, not the nature of the collateral. Track how you use the funds and discuss deductibility with your tax professional.
How Arch Lending Helps with Tax Efficiency
Arch Lending is built for crypto holders who want liquidity without sacrificing their long-term positions or triggering unnecessary tax events.
Tax-Efficient Loan Structure
No sale required. Borrow up to 60% LTV against your BTC, ETH, or SOL. Your crypto remains your property -- held in segregated custody at Anchorage Digital.
No credit check. Approval is based on your collateral, not your income or credit history, so the process does not create any taxable reporting complexity.
Fiat disbursement. Loan proceeds are delivered in USD. No crypto-to-crypto exchange occurs, eliminating any possibility of a taxable swap.
Custody and Ownership Structure
Tax treatment depends on legal ownership. Arch Lending's structure is built to support the non-taxable treatment of crypto-backed loans:
Segregated custody: Your collateral is held separately from Arch's operating assets at Anchorage Digital, a qualified custodian and federally chartered bank.
Beneficial ownership retained: You remain the owner of your crypto. Arch holds a security interest, not ownership.
No rehypothecation: Arch does not lend out or trade your collateral. It sits in custody until you repay your loan.
$250 million insurance coverage provides additional protection for your collateral assets.
Transparent Terms
At 8.49% APR with up to 60% LTV, Arch Lending's loan costs are predictable and transparent. There are no hidden fees that could complicate your tax reporting.Frequently Asked Questions
Are crypto-backed loans taxable?
No. Under current U.S. tax law, taking out a loan secured by cryptocurrency is generally not a taxable event. You are borrowing, not selling, so no capital gains tax is triggered. However, certain events related to the loan -- such as liquidation of collateral or paying interest in crypto -- can create taxable events. Consult a tax professional for advice specific to your situation.
Do I have to report a crypto loan on my taxes?
Taking out a crypto-backed loan is not a reportable disposition. However, you should maintain records of the loan for your files, including the collateral posted and its cost basis. If any taxable events occur during the loan (liquidation, interest paid in crypto), those must be reported. Discuss the Form 1040 digital asset question with your tax preparer.
Can I use a crypto loan to avoid paying capital gains tax?
A crypto-backed loan allows you to access the value of your crypto holdings without selling them, which means no capital gains tax is triggered at the time of borrowing. This is not a loophole or tax avoidance scheme -- it is the standard tax treatment of collateralized borrowing, the same principle that applies to home equity loans and securities-based lending. However, capital gains tax is deferred, not eliminated. If you eventually sell the crypto, you will owe tax at that time.
What happens if my crypto collateral is liquidated?
Liquidation is treated as a sale of your crypto. You will owe capital gains tax on the difference between your cost basis and the liquidation price. This is one of the most important tax risks to understand when taking out a crypto-backed loan. Choosing a lender with clear margin call policies and maintaining a healthy LTV ratio can help avoid liquidation.
Is the interest on a crypto loan tax-deductible?
It depends on how you use the loan proceeds. Interest on loans used for investment purposes may be deductible as investment interest expense. Interest on loans used for personal expenses is generally not deductible. Interest on loans used for business purposes may be deductible as a business expense. Consult your tax professional.
How does a crypto loan compare to selling for tax purposes?
Selling crypto triggers an immediate capital gains tax event. Borrowing against crypto does not. For a holder with significant unrealized gains, the tax savings from borrowing versus selling can be substantial -- often exceeding the total interest cost of the loan, especially for borrowers in high-tax states.
Do DeFi crypto loans have different tax implications than CeFi loans?
Potentially. The tax treatment depends on the legal structure of the arrangement. Some DeFi protocols may involve a transfer of ownership of your tokens to a smart contract, which could be treated differently than pledging collateral to a CeFi lender where you retain beneficial ownership. The IRS has not issued specific guidance on DeFi lending tax treatment. This is an area where professional tax advice is especially important.
Will crypto loan tax rules change in the future?
Possibly. Congress and the IRS continue to develop the regulatory framework for digital assets. Potential changes include extending wash sale rules to crypto, additional reporting requirements, and more specific guidance on DeFi transactions. However, the fundamental principle that collateralized borrowing is not a taxable event is deeply rooted in U.S. tax law and applies across all asset classes, making a wholesale change unlikely. Stay informed and review your strategy with a tax professional annually.
Disclaimer: This article is for educational and informational purposes only and does not constitute tax advice, legal advice, or financial advice. Tax laws are complex, vary by jurisdiction, and are subject to change. The examples and calculations in this article are simplified illustrations and may not reflect your specific tax situation. You should consult a qualified tax professional, CPA, or tax attorney before making any financial decisions based on the information provided here. Arch Lending (NMLS #2637200) provides crypto-backed lending services and is not a tax advisory firm. Nothing in this article should be construed as a guarantee of any particular tax outcome.
Ready to access liquidity without triggering a taxable event? Explore Arch Lending's crypto-backed loans -- 8.49% APR, up to 60% LTV, BTC/ETH/SOL accepted. No credit check. No selling required.