Investors with a large holding of crypto assets may wish to take a loan against their portfolio to unlock some of their wealth. In this scenario they may wish to avoid disposal of an asset to avoid a taxable event.
Instead of selling their assets, it's possible to use crypto assets as collateral to take out a loan thereby avoiding selling the underlying assets.
Loans have long been considered non-taxable by the IRS. It’s reasonable to assume that cryptocurrency loans will be treated the same way.
Some decentralized protocols use crypto-to-crypto swaps to facilitate loans. For example, if you use BTC as collateral on a platform, you might be given pBTC in return. Swaps typically generate a taxable event and given the lack of explicit guidance from the IRS, this may be considered a swap rather than a loan.
How you chose to report this type of loan will depend on if you want to take an aggressive stance or a more conservative approach to your tax position. A conservative view would treat the loan as a swap for a new token and as such treat this as a disposal and then capital gains or losses depending on how the value of the asset has changed.
An aggressive approach would treat this entirely as a loan, treating the new token as a 'claim ticket' and avoid declaring anything to the IRS.
In either case, it's always advisable to consult a CPA with these more complex types of trades.
Whilst there has been no official guidance, we can assume that interest on crypto loans will be treated in a similar way to normal loans by the IRS and as such they should be tax-deductible for business expenses.
Typically, interest on personal loans (for car payments, groceries or other general living expenses) is not tax deductible.