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I understand that taking a credit line against Bitcoin collateral is not capital gains event because there is no sale.

However,

  1. If a party, such as a company, is lent Bitcoin (BTC), sell it to pay expenses, and then pays back the loan in USD would that be a taxable event for the lender?
  2. If so is there any way to avoid that-- perhaps by paying back the loan back equivalent amount of Bitcoin?
  3. Is a Bitcoin denominated capital contribution ever not a taxable event?
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    Bitcoin is not currency. Exchanging an asset for real money sounds very much like a (tax-relevant) sale, regardless of how payment is structured. If it were a loan, the equivalent amount of Bitcoins would be returned when the loan ends, potentially with (taxable) interest in any form.
    – amon
    Feb 7, 2022 at 16:14
  • BTC is like gold for tax purposes so let's use gold as an example. If a company is loaned a $1000 gold coin would any of the follow incur a tax liability for the lender. Note that the business would be selling the original gold coin in option 1 and 2 and thus they could not pay the lender back with the original gold coin. 1. Paying back the loan with $1000 cash 2. Paying back the loan with $1000 worth of gold but a different coin 3. Paying back the exact same gold coin
    – LegalInquirer2000
    Feb 8, 2022 at 18:28
  • Alternative 1 sounds like a sale with deferred payment, not like a loan. Or it might be structured as a loan followed by a (separate) sale. Alternatives 2 and 3 are loans. Which one applies (whether the asset is fungible) would have to be specified in the contract. Of course, if the original object has to be returned then the borrower cannot sell it. A contract that allows either party to choose between 1 vs 2/3 would be unusual since it would disadvantage the other party if the price of the asset changes, though selling such an option could make sense when a risk premium is paid.
    – amon
    Feb 8, 2022 at 18:50

2 Answers 2

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  1. If a party, such as a company, is lent Bitcoin (BTC), sell it to pay expenses, and then pays back the loan in USD would that be a taxable event for the lender?

Yes.

  1. If so is there any way to avoid that-- perhaps by paying back the loan back equivalent amount of Bitcoin?

No.

  1. Is a Bitcoin denominated capital contribution ever not a taxable event?

A capital contribution (i.e. a transfer of property, in kind, to a company in exchange for equity in the company) of Bitcoin is usually not a taxable event until the Bitcoin is sold.

The sale is income to the company, although most closely held companies have pass through taxation, so it is taxed to the owners of the company on a pass through basis.

In a C-corporation, however, the conversion of Bitcoin to anything else would be a taxable sale of the C-corporation to which the Bitcoin was contributed upon which corporate entity level income taxes would be due.

In general, the answer for Bitcoin is generally going to be the same as the answer would be for pork bellies or bushels of wheat or barrels of oil.

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    Why is it a taxable event for the lender if 1 bitcoin is lent and 1 bitcoin is paid back? (Case 2) I don’t see it as a tax event if $1000 is lent and then paid back. I do see that the company selling the borrowed bitcoin is a tax event for the company.
    – George White
    Feb 7, 2022 at 23:50
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    @GeorgeWhite The key point is "equivalent amount." Which means different particular Bitcoins. If you loan an item of personal property and that same item of personal property is returned (e.g. return of collateral for pawn transaction), that doesn't involve a taxable sale. But exchanging one Bitcoin for another Bitcoin is a barter, which is taxable, even though Bitcoin are basically fungible. For tax purposes, Bitcoin are not foreign currency, they are individual items of intangible personal property.
    – ohwilleke
    Feb 8, 2022 at 22:42
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    So they are deemed non fungible for tax purposes because it is not recognized as currency even though they are fungible?
    – George White
    Feb 8, 2022 at 23:59
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    @GeorgeWhite Pretty much.
    – ohwilleke
    Feb 8, 2022 at 23:59
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No, a loan is not taxable to the borrower and the repayment of principal is not taxable to the lender. Interest paid is a deductible expense for a business borrower and interest received is income to the lender.

The form of the lent property and repaid property is irrelevant; each will be valued at fair market value. (Quirks are possible if amounts borrowed and repaid don't actually match.)

  1. If it's a capital contribution to a partnership, it's not taxable.
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