Simple cryptocurrency transactions are easy to file tax against, even when trading major coins or large exchanges. Users can choose from various tax filing platforms and employ convenient software applications to file crypto taxes. However, it is always possible for a trader to become involved in complex situations where possessing an advanced crypto tax knowledge can be beneficial. Simple crypto trading situations can turn complex if the ICO invested in is no longer tradable, or coins are lost in case of a hacked exchange. It is essential for a trader to understand such tricky situations and know how to deal with them.
DeFi Crypto Tax
DeFi stands for Decentralized Finance. Some of the popular DeFi products include lending and borrowing markets, decentralized exchanges, derivatives, payment networks, tokenized physical assets like gold, etc.
In a nutshell, DeFi helps the trader earn interest on the lending of their cryptocurrency or allows them to use their cryptocurrency as collateral for taking out loans. Additionally, there is no middleman as these crypto lending platforms operate on smart contracts. Therefore, the nature of the transaction is more direct and allows anyone holding this currency to initiate a borrowing or lending activity.
How is DeFi Crypto Taxed?
DeFi crypto attracts different tax liability and advantages depending on whether the trader is lending or borrowing. This difference is explained below.
For a crypto lender, the tax liability is calculated on the amount of interest earned on a crypto loan. The interest earned is subject to the same rates as income tax depending on the fiat value of the cryptocurrency earned. As an example,
Interest payout = 0.01BTC
BTC is trading at 8,000 USD per coin.
Equivalent income earned = $80
This income of $80 will be taxed at the same rate on income tax as is applicable for the individual’s other wages or income.
While Crypto lending attracts tax on the interest earned, crypto borrowing can translate into important tax advantages. If one type of cryptocurrency is used as collateral to borrow another type, then there is no tax realization on that particular cryptocurrency which is set as collateral. Cryptocurrency can be borrowed and even converted into fiat and will not be taxed.
Cryptocurrency will only be under tax implications if it is exchanged or sold. In other words, one can pay taxes without attracting additional taxes when selling the cryptocurrency.