How You Don’t Need To Sell BTC When You Need Cash

“Help – how can I avoid having to sell Bitcoin?!”

After the last big bull market in 2017, many crypto traders were badly surprised when they filed their tax returns in the following year. Selling Bitcoin at the end of 2017 at a high profit later proved to be a big mistake for many traders. Many were unable to pay the resulting tax because they lacked the necessary liquidity in USD.

So in order to pay the tax at all, some traders were forced to sell more Bitoin – but now at a much worse rate, and basically against their will. This new sale was also another taxable event.

A frustrating vicious circle that cost quite a few their entire cryptocurrencies.

There are ways to avoid this trap forever every active US Bitcoin investor and trader should know about.

Cryptocurrency Tax in the US

Unfortunately, the USA in particular are anything but a tax haven when it comes to Bitcoin trading.

In the US cryptocurrencies are not regarded as currency. Rather, the US tax authorities classify Bitcoin and Crypto as capital asset. This means that all crypto transactions are taxable. If long-term HODLers sell, capital gains taxes of up to over 30% can be due. Short-term profits (when selling within one year after the purchase) are included in the normal income tax.

Taxation even applies to the exchange of one cryptocurrency into another, because even this is considered a sale of property. Trading in cryptocurrencies in the USA is therefore comparable to buying and selling real estate. Even income from mining activities is taxable as income.

Bitcoin Tax Avoidance Through Bitcoin Loan

If you take out a loan against Bitcoin, you can avoid having to sell Bitcoin in order to pay something, such as high back taxes (because of Bitcoin profits).

In this way you get cash immediately and the credit itself is not taxable.

With such a Bitcoin loan you can e.g. make a tax additional payment, for which you don’t want to be forced to sell your precious Bitcoin.

But you can also use the credit for an investment:

At the end of 2018 the actor Brock Pierce bought a property in Amsterdam for which he took out a loan, which he covered exclusively with Bitcoin. For his loan of $1.2 million he had to deposit double the value in Bitcoin as security. A measure that is attributable to the high volatility of crypto currencies.

Bitcoin Loan Tax-Free

If you deposit Bitcoin with a Bitcoin Loan company to get a loan in USD, this event will not be taxed. After all, a loan is nothing to pay tax on. It is a debt taken up, not a profit.

If you buy a property from this loan with the aim of renting it out, you can even deduct the interest on the loan from your tax bill. Because the intention to rent out the property turns the loan into a kind of business investment loan, whereby interest expenses can then be regarded as costs.

Particularly in times of high prices, investors can benefit from a Bitcoin Loan because they get significantly more money for their deposited Bitcoin at that moment. And: You can have a part of your deposited Bitcoin back again prematurely from a certain Bitcoin price level.

Let’s take a closer look at how Bitcoin loans work:

How Bitcoin Loans Work

Bitcoin loan companies offer a loan-to-value ratio of up to 50%.

This has the simple reason that Bitcoin is very volatile. If the borrower is paid out significantly less USD than his Bitcoin deposit is currently worth, this ensures that the loan agreement can be maintained even during a major price drop.

So if the borrower gets paid out 50% of the current Bitcoin rate as a USD loan, the Bitcoin rate could fall in the direction of half the original value without the need to cancel the loan agreement.

Shortly before the 50% mark, however, the loan company would pull the emergency brake. In order not to incur a loss, the company would be forced to sell your Bitcoin at 50% depreciation in order to recover the money it lent you.

That would be a so-called liquidation of the deposited Bitcoin. However, this does not simply happen unexpectedly – in advance of such an event, the borrower is warned in the form of a margin call.

Bitcoin Loan Margin Call

With a margin call you have the possibility to shoot more Bitcoin, in the expectation that the price will rise again in the long run, or you pay back the borrowed USD immediately. In this case the credit agreement will be terminated and a new one can be opened with respect to the current Bitcoin exchange rate.

It is particularly important to react to the margin call. Because if the credit company has to sell the Bitcoin collateral to get back the money they lent you, the IRS may equate this as the sale of a property on which you have to pay capital gains taxes. This may seem like complete madness and unfair in this case, but according to US tax experts, this would likely be the legal tax situation.

In order to comply with this tax law, you must urgently consider the following:

The deposited cryptocurrency may not be exchanged, exactly like in the case of real estates.

It is important that the Loan Company keeps the originally deposited Bitcoin safe, and sends these back again at the end of the loan term, from the same Wallet address.

Borrowers have to get back exactly the same cryptocurrency, which they deposited, otherwise the IRS could assume an intermediate trade and require capital gains taxes on it. Cryptocurrencies, like real estate, may not be exchanged. After all, one cannot simply return another property than was originally the subject of a loan relationship.

Here is another source explaining the tax situation regarding loans.

Since 2014, there has been no further information on the taxation of cryptocurrencies in the USA. Since then, it has only been clear that Bitcoin & co. are to be treated like capital assets / property for tax purposes.

US tax advisors are therefore relying on the fact that in all cases in which there is no specification for the tax treatment of Bitcoin, the tax laws for assets apply. So there is no guarantee that the IRS will agree to your tax return, but it is likely that the Bitcoin credit strategy will go well if you pay attention to the details.

This is what Bitcoin credit companies have specialized in. For their part, they make sure that the credit transaction for the borrower should be tax-exempt. This applies in particular to the safe custody of the Bitcoin deposit.

These Bitcoin remain on the same wallet address and are not touched so that they can be returned from the same wallet address.

The 2 Loan Scenarios related to the Bitcoin Course:

1. Take out a Loan Against Bitcoin at a low BTC Rate

If you deposit BTC as credit collateral in times of a low price (bear market), this means that you first have to deposit a relatively large amount of BTC in order to receive a certain USD amount. If the rate should rise drastically while the loan is running, you have the option of having part of the deposited BTC returned to you prematurely until the loan-to-value ratio returns to the originally agreed percentage (e.g. 50%). At that moment, it should be borne in mind that the liquidation price will also adjust to this level. If the price rises, you would be able to get back your deposited Bitcoin bit by bit without having to pay taxes on it.

Otherwise, you get your entire Bitcoin deposit back on the day of the end of the credit period. If the BTC rate is then significantly higher, you get a relatively higher value back, but you do not have to pay tax on it.

2. Take out a Loan For Bitcoin at a high BTC Rate

If you deposit BTC as collateral in times of very high exchange rates, you have the advantage that you have to give relatively little BTC to receive a certain USD amount.

However, in the event of a subsequent stronger downward price correction, you may have to react to the margin call. (Add more BTC or repay and terminate loan immediately.)

If you pay back the USD at the end of the loan term, the Bitcoin you get back may be worth significantly less than before. However, with a private loan such a loss doesn’t affect the tax either (it does not count as costs or expenses for tax purposes ).