Cryptocurrency Traders Evade Taxes Making Use of Lending Loopholes
Evade Taxes by Loaning out Equivalent Amount
Taxation has been one larger problems facing the cryptocurrency industry since it came into prominence. Earlier this year, in March 2018, the Internal Revenue Service (IRS) sent an official reminder to the public asking them to report any income in the form of virtual currencies in their income tax returns.
Notably, the IRS treats cryptocurrency as property. Hence, if a person holds digital currencies for more than a year before selling it, they are liable to pay long-term capital gains tax which can range anywhere from 15 percent to 23.8 percent.
Conversely, if an individual sells their crypto holdings within a year, the proceedings are treated as short-term capital gains and taxed at normal income tax rates, which are usually higher than long-term capital gains. In an attempt to evade taxes on crypto-to-crypto transactions, market participants have resorted to taking out loans from blockchain-based lending platforms.
Say, Dan holds $10,000 worth of BTC purchased ten months ago. However, seeing the flurry of developments in the Ethereum community, he senses the price of ether will shoot up in the market and wants to buy $2,500 worth of ETH.
To take his position in the market with ether, Dan approaches any of the lending platforms which offer fiat loans in exchange for cryptocurrency. For example’s sake, let’s assume Dan takes a loan from BlockFi worth $2,500 after putting $5,000 worth of BTC as collateral.
Later, Dan uses the loan amount to purchase $2,500 worth of ETH in the market. Subsequently, after two months, Dan repays the loan amount and gets his $5,000 worth of BTC back. Thus with this arrangement, Dan was able to jump past tax implications of short-term capital gains by loaning out the required amount.
Make no mistake, however, this tedious process of loaning out the amount is not free of risks. In case the price of BTC and ETH plummet during the long process, Dan could be under huge financial distress. Similarly, the majority of blockchain-based lending platforms have a fixed crypto-to-fiat ratio.
Moreover, taxes on crypto holdings can prove to be a serious problem, as recently an American college student was slapped with a $400,000 tax liability from $5,000 crypto investment.