Crypto Loans Tax for 2025

Generally, taking out a cryptocurrency loan itself does not create a taxable event. When you borrow against your crypto assets, you use them as collateral without actually selling them, similar to a traditional loan. Because there's no sale, no immediate taxes are due.

Some crypto lending situations can trigger taxes. For example, if your collateral gets liquidated because its value drops too much, that could be considered a taxable event. Also, if you repay the loan using cryptocurrency that has increased in value, the IRS may see that as a taxable disposal, potentially leading to capital gains tax. Knowing these details is crucial to avoid unexpected tax issues. When in doubt, consult a crypto tax professional like ours at TokenTax.

Do crypto loans count as income?

In most cases, taking out a crypto loan is not considered income. The IRS treats loans as liabilities since they have to be repaid. But if your crypto loan involves earning interest or other rewards, such as through a DeFi platform, those earnings might be considered taxable income. Accurately reporting these earnings ensures you stay compliant with tax laws.

International taxpayers can refer to our helpful country guides for more information about regions outside the US.

Looking to calculate your crypto profit? Try our free crypto profit calculator.

Whether or not the interest on your crypto loan is tax-deductible depends on how you use the borrowed funds. If you’re using the loan for investments, like buying more cryptocurrency, the interest payments might be deductible as investment interest expense. This is similar to traditional loans, where investment-related interest can reduce your taxable income up to the amount of your investment income for that year.

The interest is generally not deductible if you use the loan for personal expenses, such as a car or vacation. You should document how you use the loan funds and consult a crypto tax professional to ensure you make the correct deductions.

See our expert picks of the best crypto loans.

If your crypto collateral gets liquidated, it’s typically treated as a taxable event. The IRS views the liquidation of collateral as a sale, which could result in capital gains or losses based on the value of the crypto at the time of liquidation compared to when you first acquired it.

For example, if you use Bitcoin as collateral, its value significantly declines, and you are liquidated, you must report this as a capital gain or loss on your tax return. The exact tax impact will depend on how much the value of your Bitcoin has changed since you acquired it. Keeping track of and reporting these liquidations correctly is crucial to avoid penalties.

Self-repaying crypto loans (such as those offered by platforms like Alchemix) present unique tax challenges. These loans use your collateral to generate yield, which is used to repay your loan over time. While convenient, this setup can also result in taxable events.

The IRS may view the income generated by your collateral as taxable. Additionally, if the yield used to repay the loan exceeds the original loan amount, this could trigger income tax liability. Understanding potential crypto loans tax is important to avoid surprise bills.

Crypto loans let you borrow money using cryptocurrency as collateral, allowing you to access funds without selling your assets. These loans are popular among crypto investors who want liquidity without triggering a taxable event. Both centralized and decentralized platforms offer crypto loans, each with its own set of risks, interest rates, and collateral requirements.

Centralized platforms, like BlockFi and Nexo, typically require KYC (Know Your Customer) verification and offer more regulatory protections. Decentralized platforms like Aave and Compound use smart contracts to manage loans, providing more privacy and control but often with higher risks.

See our expert picks of the best no KYC crypto exchanges.

Navigating taxes on DeFi crypto loans can be complex, with different rules depending on the platform and loan structure. TokenTax simplifies this by accurately calculating your crypto taxes. Our software tracks all DeFi transactions, including loans, interest payments, and liquidations, ensuring compliance with IRS regulations.

TokenTax also provides expert guidance on reporting these transactions on your tax return, reducing the risk of errors or audits. Whether you’re dealing with a straightforward loan or a more complex self-repaying structure, TokenTax offers the tools and support you need to manage your crypto tax obligations confidently.

Looking to calculate your crypto taxes? Try our free crypto tax calculator.

Crypto loans tax FAQs

Is a DeFi loan taxable?

Taking out a DeFi loan itself is not typically a taxable event, as it involves borrowing rather than selling assets. However, certain actions linked to the loan, such as earning income from collateral or repaying with appreciated crypto, can lead to taxable events. Understanding when these occur and how to report them is key to staying compliant.

Do you pay taxes on crypto interest?

Yes, interest earned on crypto loans is generally treated as taxable income. Whether you earn interest on a centralized platform or through a DeFi protocol, this income typically should be reported on your tax return. Tax treatment varies by region.

What’s the difference between centralized crypto loans vs DeFi crypto loans?

Centralized crypto loans are offered by platforms that operate like traditional financial institutions, requiring KYC verification and providing more regulatory oversight. These loans often have lower interest rates and more protections but may involve giving up some privacy.

DeFi crypto loans, on the other hand, are managed by smart contracts on decentralized platforms, offering more privacy and control but with higher risks and less regulatory protection.