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Tax Implications In A Cryptocurrency Loan Program

In the Ferrari or Jaguar, switchin’ four lanes

With the top down screamin’ out, money ain’t a thang

Bubble hard in the double R, flashing the rings

With the window cracked, holla back, money ain’t a thang

-Money Ain’t a Thang, Jermaine Dupri

Money “ain’t a thang” until you need it. What happens if you lost all of your money due to your crazy spending habits? Now, you may need a loan just to survive! The moment that cryptocurrencies started to gain the media’s attention, you knew that so-called “smart” people would start getting creative. In this article, we will talk about cryptocurrency loan programs and how to protect yourself in case of an IRS audit. My only disclaimer is that I’m not qualified to give investment advice. I won’t concentrate on the high risks shared with all parties involved in a cryptocurrency loan agreement. I can tell you that I’m way too conservative to deal with this type of loan. One month, one bitcoin can be worth $10,000 and the next month that same bitcoin can be worth $7,500. To cover for just this particular risk, you know that interest and repayment agreement must be insane! However, the risk that I’m most concern about is how will the IRS treat these loans. Right now, it is all a guessing game because the IRS hasn’t written any guidance on this matter. If a tax accountant tells you that he or she knows exactly how to treat this matter then that person is lying to you. What accountants can do right now is assume or estimate what may be the best way to report the cryptocurrency loan transactions to the IRS.

Here Are The Issues:

1. When you borrow money, it is not income for tax purposes because you must pay it back. When you lend money, you get no tax deduction and it is not a taxable event. However, the IRS does treat cryptocurrencies as currency. The IRS treats cryptocurrencies as property. The treatment of property makes this a lot more complex

2. What happens if you are relieved of the obligation to pay back the cryptocurrency loan? In most situations, the debt amount forgiven is considered the income that you must report on your tax returns as “other income.” How should we report the value of the amount forgiven in digital currency?

3. The IRS may not agree that these types of cryptocurrency loan programs qualify as regular loan programs in regard to taxes. There could be a chance that the IRS treat repayments of these arrangements as sales transactions. If treated as a sales transaction, then you know it is a taxable (reportable) transaction. The fluctuating value of cryptocurrency can make this a huge tax issue.

4. If you don’t have a big headache by now, how will interest payments be treated? Even in a perfect world that the IRS agrees to treat these arrangements as loans, this can be a tax mess. Just think, usually, loan interest repayments are not taxable. However, if you pay the loan interest back in cryptocurrencies, each interest payment can be considered a sale. Remember that the IRS treats cryptocurrencies as property, not as a currency. If considered a sale, you must figure out the basis of each loan repayment and report it on your tax returns. Imagine if you made monthly interest payments in one year, you must report twelve sales transactions on Schedule D

5. The last issue on this list is the scariest! The last issue is that I’m probably missing many other possible issues in this article! Taxes are a cruel beast, but cryptocurrency taxes are a cruel demigod beast! That comparison was extreme, but you get my point.

How To Protect Yourself From An IRS Audit?

1. Documentation

2. Documentation

3. Documentation

In any manner that the IRS hasn’t developed their view on, it is very important to keep very detailed documentation. I would recommend emphasizing in all cryptocurrency loan documents that the transaction is intended to be a loan, not a sale or disposition. You could also document clearly that both parties will report the loan in this manner for tax and accounting purposes. This may or may not work but at a minimum you have a fighting chance. The loan documentation could emphasize that repayment should be made in digital currency that is identical in value and denomination (i.e., Bitcoins for Bitcoins, Ripples for Ripples, etc.) to the digital currency lent. Also, the loan document could even require that repayment be made with the exact same cryptocurrency lent. If you really want to be ultra-protective, try to put in the document that the loan repayments will be made from the same wallet to which it was lent.

Always keep in mind that there is no best strategy. The only strategy may be to be conservative. I know that we have some major risk-takers but betting on how the IRS will view a major transaction is just too high in my opinion. In audits, the more documents that you can produce, the better the chances of you surviving the audit. Make sure the documentation is very organized and easy for the IRS to follow. Just don’t throw a stack of papers on the auditor desk and hope the auditor will figure it out. Make sure to highlight the important sections. My number one piece of advice is to consult with a tax accountant before entering any cryptocurrency loan arrangement. Don’t be cheap!

Need help with your crypto taxes? Well, contact Jamaal "Crypto J" at!




IG: @36chamberscryptotaxes

Twitter: 36cryptotaxes

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