Let's say I have 1 bitcoin and I am selling it for $100k, and I bought it for $0 at the time. Assuming a Capital Gains Tax rate of 33% I would owe $33k, leaving me with only $66k.

Could I instead get a loan of $100k backed by bitcoin as collateral + some fee for the loan provider. I can then spend that full $100k.

Oh no! I'm not able to pay the loan back because I spent it all. How unfortunate... Now the loan provider has no choice but to sell of my bitcoin to get their $100k back, and it looks like I'm after avoiding capital gains tax.

Is this legal? I live in Ireland so it would be nice to know what the laws are like here, but it would also be interesting to know what it's like in the US.

Or do you have to pay capital gains tax before using something as collateral for a loan?

  • 2
    If the bitcoin price were stable (ha ha), then a better strategy would be to sell e.g. an eighth of it every year, and (at least in the UK) the gain would fall within the annual capital gains exemption. You could add the loan on top if anyone were prepared to lend you money against bitcoin and repay the loan from the proceeds. In Ireland the CGT exemption appears to be €1270, so this would take you ~80 years!
    – abligh
    Commented May 5, 2021 at 6:19

5 Answers 5


Yes, you can borrow tax-free

Bitcoin (or really, any currency not your home currency) is a security like a stock or bond.

Whenever you take a loan using a security as collateral, that is not a taxable event, and so you do not owe taxes on the money you borrowed.

Perfect world, you pay it back and this is not taxable either: the loan/repayment is a non-event to the tax authorities. (Although interest might be tax deductible).

When this goes wrong: you default

If you default and keep your collateral, at some point, the lender decides you'll never pay, and forgives aka "writes off" the loan. This forgiveness is considered ordinary income and it is taxable in the year forgiven. In the US this is waived if you can show that you were insolvent at the time of default.

When this goes wrong: forced sale of collateral

The collateral is still your property. The bank just has a lien on it or other form of control, like it's in your brokerage account in their bank such that they can flag it, force sale, and intercept funds.

When the bank forces sale of your collateral to pay your debt, that is a sale of the security for tax purposes. The proceeds go to you (as far as the tax person is concerned), even though the bank certainly will intercept the proceeds. So the tax liability goes to you.

Note that standard capital gains rules apply, so if you owned it less than 1 year when you signed up for the loan, yet the bank forced the sale after 1 year of ownership, then it counts as holding the security longer than 1 year for tax purposes. (e.g. qualifying for the lower "long term capital gains" rate in the US).

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    This is the correct answer to OP's question
    – obscurans
    Commented May 5, 2021 at 0:03
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    In US, interest paid by an individual is tax-deductible only if (1) it is on a home mortgage used to buy, build, or improve the house, subject to limits, and only if you itemize (which since 2017 few people do) or (2) it is used to finance taxable investments (and only to the extent of taxable investment income). Businesses OTOH can deduct essentially all interest and that's a major reason many US businesses prefer to finance themselves with debt (bonds or loans) rather than equity (stocks). Commented May 5, 2021 at 1:25
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    What if your contract with the bank allowed them to repossess your collateral, rather than forcing you to sell it? No crypto's getting sold; you're just giving it to the bank.
    – nick012000
    Commented May 5, 2021 at 2:55
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    @nick012000 if they take that value as settlement of the loan, it's still a trade, for the value of the loan. Your proceeds and their cost basis will be the value of the loan. Commented May 5, 2021 at 4:08
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    @nick012000 You gave it to the bank. But the bank gave you forgiveness of a $100,000 loan, which is worth $100,000 and is taxable income. Congratulations, you turned a long-term capital gain into ordinary income. Commented May 5, 2021 at 12:05

This scheme merely defers the CGT. The gain occurs when the bitcoin is sold to pay off the debt, thereby realising its value for the original owner by cancelling the debt of $100k. At this point CGT will be payable on the sale.

This is a general principle with loans: if you borrow $100k then you don't pay tax on it. If the loan is subsequently forgiven you then pay tax at that point. This is an issue when company directors or senior employees are loaned money by their businesses; the Revenue need to keep a close eye on such schemes to make sure that there is a genuine intention that the money be repaid and not just left on the books indefintely.

Of course, depending on the owner's financial affairs moving the tax point that might be a useful thing to do if it lets you take advantage of some better tax rate or allowance that becomes available in the following year.

  • I think, since the coin is the collateral, that the debtor gains the unsold coin, and the debtor makes the sale. However, I assume transfer of ownership of the coin to the debtor is probably what triggers the CGT, rather than the subsequent sale by the debtor. Commented May 4, 2021 at 23:35
  • @MooingDuck The person lending the money is the creditor, the borrower is the debtor. Do you have it the right way round? Commented May 5, 2021 at 5:03
  • No, I definitely had it wrong Commented May 5, 2021 at 15:45

Now the loan provider has no choice but to sell of my bitcoin to get their $100k back, and it looks like I'm after avoiding capital gains tax.

No, you're not avoiding it at all.

By losing your capital you do not negate the fact that you gained it. You pay tax on the capital you gain regardless of what then happens to it.

Technically, the gain here is realized (i.e. your bitcoin is accepted to pay off your debt) simultaneously with you losing it. But this is not an excuse to not pay tax on it because the gain and the loss happen in the course of unrelated activities: one is your asset market price going up, the other is your loan obligation.

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    "You pay tax on the capital you gain regardless of what then happens to it" This depends. You typically dont pay tax on unrealized gains. There are ways to avoid realizing gains for tax purposes while still getting the benefit of the gains. I assume here you mean this isnt one of those exceptions. When are the gains realized for tax purposes? How does this get reported?
    – Matt
    Commented May 4, 2021 at 23:43
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    @Matt I don't know what "unrealized gain" is. If it does not realize it is not a gain.
    – Greendrake
    Commented May 4, 2021 at 23:46
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    This doesn't answer the question. Borrowing against is generally not a tax event. The sale on default is what realizes the gain. Unrealized gain is standard terminology.
    – obscurans
    Commented May 5, 2021 at 0:04
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    Agreed here, but the deferral is a very significant aspect (to the point tax rules want to take a look at whether it's being abused to never realize the gain). But yeah, never converting to dollars is impossible if you want to spend in dollars - something people tend to gloss over a lot. (And if you spend in coin, you are still disposing of non-functional currency and foreign exchange rules at least still apply)
    – obscurans
    Commented May 5, 2021 at 2:34
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    @obscurans Foreign exchange rules do not apply. Cryptocurrencies aren't foreign. If you spend it, you have a capital gain just the same as if you sold it for dollars. Commented May 5, 2021 at 12:07

Capital gains are taxable when they are realized unless statutory exceptions apply, under the U.S. Internal Revenue Code.

A loan is not considered income. When a creditor sells collateral in order to secure payment of a debt, the sale by the creditor of collateral owned by the debtor is a realization event that triggers capital gains taxation on the part of the debtor.

This doesn't mean that loan provided no tax benefit.

Suppose that the loan defaulted two days after the owner of the collateral died. Due to the step up in basis of capital gains at death, under Internal Revenue Code § 1014, the collateral would not be treated as if it was purchased at its negligible actual purchase price, instead it would be treated as if it was purchased at fair market value on date of death, effectively forgiving all capital gains taxes on the accrued by unrealized capital gains from date of purchase to date of death. (FYI, Canada taxes unrealized capital gains at death, unlike the U.S.)

Similarly, suppose that the investment was investment real estate, rather than bitcoin, and the loan was an unsecured line of credit, rather than a loan secured by collateral. The investor-debtor could sell the investment real estate and reinvest the proceeds in different real estate using someone called a "qualified intermediary" to hold the proceeds between transactions and complying with certain tax regulations, to avoid triggering the realization and taxation of the capital gains in the original real estate, using Section 1031 of the Internal Revenue Code.

Also, the loan, even if eventually called or paid off with liquidated bitcoin by the debtor (rather than having it seized by the creditor), still made it possible to defer taxation of the capital gain. All other things being equal, deferral of taxation is an economic benefit. It means that you are investing before tax dollars, rather than a smaller amount of after tax dollars, and thus earning greater returns if the investment is increasing in value.

And, if the tax rate that the capital gains are subject to is lower when the investment is sold than when the loan was taken out, that is an additional benefit. But it is also possible that the tax rate that the capital gains are subject to will be higher when the investment is sold than when the loan was taken out, and that could outweigh any economic benefits that come from tax deferral.

In particular, sometimes the capital gains tax rate depends upon the holding period of the asset. Suppose you have owned the asset for eleven months, but there is a lower rate available with a two year holding period (or a one year holding period). If you borrow the funds you need to spend for fourteen months, then sell the investment and use the proceeds to pay off the loan, you have not only deferred taxation, you have also secured a lower long term capital gains tax rate rather than a higher short term capital gains tax rate.

There are some anti-evasion rules designed to limit these kinds of transactions, such as the "wash sale rule" that limits attempts to realize losses by briefly selling assets and then repurchasing them, and rules to prevent people from avoiding tax by transferring assets by gift to a terminally ill person (which doesn't result in the realization of capital gain and instead gives the asset a "carryover basis") who then leaves it to the person who gave it to him in his will. So, merely following the logic of the basis rules about taxation of loans and capital gains doesn't always work. There are maybe half a dozen or a dozen of these rules that each apply in very specific circumstances and are too varied to recite in this answer.

The other consideration is that simultaneously having an investment asset whose value changes over time, and a loan, is riskier than then selling the asset and spending the proceeds. In the example in the OP, the creditor would seize the $100K in payment of the debt, and the debtor would owe $33K in taxes (which are harder than the loan itself to discharge in bankruptcy) that would have to be paid from other assets of the debtor.

  • I'm curious about the possibility of deferring capital gains to get a short-term capital gains tax rate. It is obviously risky to use an asset as collateral for the loan if there is a chance that the asset will decrease in value in the future (e.g. bitcoin), since the bank might liquidate you. If you are holding bitcoin, would it be possible to loan additional bitcoin using the bitcoin as collateral, and only then convert that to dollars for expenditure? This way, you'll lever get liquidated as long as you pay interest. Or is exchanging this loaned bitcoin for dollars treated as if you... Commented May 7, 2021 at 14:14
  • ... exchanged the original bitcoin, and then you must pay CGT? Commented May 7, 2021 at 14:14
  • @DavidCallanan Any exchange of bitcoin for anything else triggers capital gains tax, even if it isn't converted to dollars. In the event of a margin call (which is what an announcement that a lender intends to seize financial asset collateral is usually called) adding more collateral is usually allowed to prevent seizure and liquidation of the collateral (details depend on the security agreement contract terms that one signs to pledge the bitcoin and relevant sections of Article 9 of the Uniform Commercial Code).
    – ohwilleke
    Commented May 7, 2021 at 14:59

As others have already said your scenario doesn't work. However, there is a related scenario that actually does work:

You have stock with a lot of capital gains and you don't expect to live too many more years. It can make economic sense to take a margin loan rather than sell shares. You borrow against the shares, paying interest in the money. When you die the basis is stepped up to current before your estate sells the shares to repay the loan. Just make very sure you don't run out of money doing this!

  • Good point, but if you're about to die, you'll probably die before tax authorities come after you? So you'd get away with just not paying tax. But I suppose if it is a few years then it'd be worth it. Commented May 7, 2021 at 14:16
  • @DavidCallanan What I'm talking about is viable even over a period of some years. And death doesn't avoid the taxman. Commented May 7, 2021 at 15:13

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