How crypto loans impact your taxes in 2025

Crypto-backed loans and mortgages have become an essential tool for investors looking to leverage their digital assets without selling them. While these loans provide liquidity, they also introduce unique tax implications that can impact your tax filings.

Some transactions, such as borrowing against crypto or simply holding collateral, do not trigger taxes. Others, such as liquidation or repayment with appreciated assets, can create taxable events. Knowing the difference is key to avoiding unexpected tax liabilities.

As tax season unfolds, it’s important to understand how these rules apply to your situation. This guide will break down what’s taxable, what isn’t, and how to report your crypto loan activity. But remember, this is for informational purposes only. Always consult a tax professional for personalized guidance.

Are crypto-backed loans taxable?

Taking out a crypto-backed loan is not a taxable event. Since a loan is considered a liability, not income, receiving loan proceeds does not count as a gain, and you won’t owe taxes on the borrowed funds.

Similarly, putting up crypto as collateral does not trigger a taxable event. However, if that collateral is earning staking rewards while locked, those rewards are taxable as ordinary income upon receipt. The IRS considers staking rewards as earned income, meaning you must report them based on their fair market value at the time they are received.

So, while borrowing itself is not taxable, earning staking rewards or failing to repay your loan properly can lead to tax consequences.

When crypto loans create taxable events

While taking out a loan isn’t taxable, certain transactions related to repayment, liquidation, and earned income can trigger taxes.

Collateral liquidation by the lender

If your lender liquidates your collateral due to a margin call or non-payment, the IRS treats it as a taxable sale. Even though you didn’t personally sell the asset, the lender’s liquidation is considered a disposal, meaning you must report any capital gain or loss.

For example, if you originally bought 1 BTC for $20,000 and your lender liquidates it at $18,000, you must report a $2,000 capital loss on Form 8949 and Schedule D. While you don’t owe taxes on a loss, you must still report it, and if you have capital gains elsewhere, you can use the loss to offset them.

Repaying a loan with appreciated crypto

If you repay a loan using crypto that has gained in value since you acquired it, the IRS considers this a taxable disposal. Since crypto is treated as property, paying off a debt with it is the same as selling it.

Imagine you borrowed $30,000 by pledging 3 BTC as collateral when Bitcoin was worth $10,000 per BTC. Later, BTC rises to $30,000, and you use just 1 BTC to repay the entire loan. The IRS sees this as a sale:

• Since you originally acquired the BTC for $10,000 and are now using it at a $30,000 valuation, you owe capital gains tax on the $20,000 gain.
• If you held the BTC for less than a year, it’s taxed as short-term capital gains (10%-37%, depending on income).
• If you held it for more than a year, it qualifies for long-term capital gains rates (0%, 15%, or 20%).

Even if you’re taxed at the highest short-term rate of 37%, you still walk away with a $12,600 after-tax gain. Holding for over a year reduces the tax burden, increasing the after-tax gain to $16,000.

Despite the taxes, borrowing against crypto remains a valuable strategy. Instead of selling BTC at $10,000 and missing out on appreciation, the investor was able to repay their loan using the increased value of their asset.

Earning interest from crypto lending If you lend out your crypto through a CeFi or DeFi platform and earn interest, the IRS treats it as ordinary income, just like interest earned on a savings account.

For example, if you earn $500 in interest from lending USDC, you must report it as other income on Schedule 1 (Form 1040). Depending on your total taxable income, this could be taxed at rates ranging from 10% to 37%.

What happens if you repay with depreciated crypto?

Repaying a loan with crypto that has lost value does not create a taxable event. Unlike collateral liquidation, where the lender sells your assets at a loss and you can report that loss, voluntarily using depreciated crypto to repay a loan does not allow you to deduct that loss for tax purposes.

For instance, if you took out a $10,000 loan and repaid it with 1 BTC originally acquired at $12,000 but now worth $10,000, no taxable event occurs. The IRS does not allow you to claim a $2,000 capital loss simply for repaying a loan with an asset that has dropped in value. Losses can only be recognized in taxable sales, not loan repayments.

How to report crypto loans on your taxes

To stay compliant, make sure to file the correct forms:

Starting in 2026, exchanges will be required to issue Form 1099-DA, which will report digital asset transactions to the IRS. This means tax enforcement will get stricter, and discrepancies between your filings and exchange reports could lead to an audit.

Best practices for staying compliant

Tax rules around crypto-backed loans are complex, and the IRS is paying closer attention. Here’s how to stay compliant and minimize your tax liability:

• Use crypto tax software like TokenTax or Koinly to track transactions, cost basis, and liquidations.
• Keep detailed records of loan agreements, repayment transactions, and collateral movements, including wallet addresses and transaction IDs.
• Plan for capital gains taxes if repaying with appreciated crypto. Holding for over a year can reduce the tax burden.
• Consult a tax professional to ensure you're maximizing deductions and staying compliant.

Final thoughts Crypto-backed loans can be a powerful financial tool, but they come with tax responsibilities. While borrowing itself isn’t taxable, events like collateral liquidation and repaying with appreciated crypto can trigger capital gains taxes.

By understanding the tax implications and keeping accurate records, you can maximize the benefits of crypto loans while avoiding costly tax mistakes. The IRS is ramping up enforcement on digital asset transactions, so accurate reporting and smart tax planning are more important than ever.

The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product.