Borrowing, Lending, Loans, Repayment

I’ve just spent 2 hours reading every post here about borrowing from protocols such as Aave and Compound, as well as the Koinly help article:

As several users point out, the help article potentially doesn’t make sense.

Is Koinly really suggesting that borrowing 10k USDC is a taxable deposit, and later repaying 10k USDC is a taxable withdrawal?

Won’t the initial “deposit” of 10k USDC from borrowing be seen by Koinly as 10k USDC in income without any basis?

Your Q: Won’t the initial “deposit” of 10k USDC from borrowing be seen by Koinly as 10k USDC in income without any basis?

Answer (based in part on Koinly Help article): No. Deposit txns that are not tagged or labelled will not be treated by Koinly as taxable transactions. Rather, the borrowed crypto (a deposit) will be assigned a cost base equal to its market value on the loan date. A capital gain or loss will be incurred when the borrowed crypto is disposed of, whether by spending it, selling it or repaying the loan.

Note that the Koinly Help article is based on a tax position that borrowing crypto is a property acquisition (akin to acquiring shares or real estate) rather than a loan tx (aking to borrowing fiat from the bank). A sale or disosal of acquired property gives rise to a capital gain or capital loss in most jurisdictions.

However, you need to look at the specific tax treatment of crypto borrowings in your jurisdiction to see whether the jurisdiction treats the particular borrowing structure as a loan for tax purposes or as an acquisition of property. The Koinly Help article is based on the latter approach as this is the position that is best supported by tax laws in most jurisdictions.

Here is commentary on the likely position in the US where the IRS has not provided specific guidance (AFAIK). "The major difficulty in treating crypto loans as loans for tax purposes is IRS Notice 2014-21, which states that (at least as far as the IRS is concerned) convertible virtual currency is property (Notice 2014-21, Q&A-2), and according to established case law, a loan for tax purposes is a “a debt [that] necessarily involves an obligation to pay money and not an obligation to deliver property” (R.S. Stahl v. United States , 441 F. 2d 999 (1970)).

Hope this helps.

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First of all, taking a loan is not taxable. It counts as a basis and you are only taxed on future profits from trades and sales from those coins. For example, if you borrow $10k USDC, send to Coinbase, convert to USD and withdraw, Koinly should not be showing any profit or loss.

However, you may be talking about your collateral. For example, when you deposit collateral to Aave, you are given “am” tokens as representative of your deposit (ETH->amETH).There are two schools of thought on this. One is that this counts as a token exchange and you are immediately taxed on your profits or losses.

The other opinion is to tag the transaction as a “swap”. This delays profits or losses but you have to be very consistent to mark them as swaps for all deposits and withdrawals. Also note that the withdrawal will generate an error code for “unknown cost basis” for the extra tokens that you earn due to interest. Those tokens will assume zero cost basis (which is true) but you need to add a manual transaction for the extra coins (tagged as interest) so that they are taxed as income.

First method is easier (and more conservative). Second method requires more due diligence but works similar to a traditional bank account. It also represents true profit and loss at the time it is actually earned. (After all, you are not taxed on vehicle or home value when taking a secured loan so there is some precedence here.) Either way, I cannot advise you in the path to choose because I am not a accountant or attorney.

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