Bitcoin Investors and Traders Are Evading Crypto Taxes with a Little-Known ‘Lending Loophole’
In a recent article published by Venture Beat a few days ago, there are some cryptocurrency traders that are avoiding taxes in their country. At the moment, every single crypto-to-crypto trade is considered a taxable event. However, there is a way to avoid this tax.
Venture Beat explains that if a user owns Bitcoin and wants to purchase Stellar Lumens (XLM), then the investor would have to sell Bitcoin and buy Stellar. This would trigger short-term capital gains. However, if the Bitcoins held were purchased less than a year ago, it is possible to take out a loan against Bitcoin and buy Stellar.
The Internal Revenue Service (IRS) treats cryptocurrencies as property. That means that if a person owns virtual currencies for over a year before selling them, they are able to pay a long-term capital gain tax between 15% to 23.8%.
If the funds are sold within a year, the proceedings are considered short-term capital gains and they follow normal income tax rates. These rates are usually higher than long-term capital gains. This is the reason why investors took the decision to take loans in order to evade crypto-to-crypto transactions.
However, there are some downsides that Venture Beat marks. First, if Stellar and Bitcoin price plummets the loan cannot be paid. Moreover, lending platforms work in different geographical locations and jurisdictions, which means that the possibility is not available for everyone.
According to data provided by BlockFi, a leading company in the cryptocurrency market explained that 57% of the loans given are used to pay for general expenses, including day-to-day living expenses, taxes and travel. At the same time, the company gives 9% of it loans to people starting a business, investing in more crypto or in other assets, and those that have to pay down debt. Finally, 4% of the loans are used to purchase real estate.