Evade Taxes by Loaning out Equivalent Amount
Taxation has been one larger problems facing the cryptocurrency industry since it came into prominence. Earlier this year, in March 2018, the Internal Revenue Service (IRS) sent an official reminder to the public asking them to report any income in the form of virtual currencies in their income tax returns.
Notably, the IRS treats cryptocurrency as property. Hence, if a person holds digital currencies for more than a year before selling it, they are liable to pay long-term capital gains tax which can range anywhere from 15 percent to 23.8 percent.
Conversely, if an individual sells their crypto holdings within a year, the proceedings are treated as short-term capital gains and taxed at normal income tax rates, which are usually higher than long-term capital gains. In an attempt to evade taxes on crypto-to-crypto transactions, market participants have resorted to taking out loans from blockchain-based lending platforms.
Say, Dan holds $10,000 worth of BTC purchased ten months ago. However, seeing the flurry of developments in the Ethereum community, he senses the price of ether will shoot up in the market and wants to buy $2,500 worth of ETH.
To take his position in the market with ether, Dan approaches any of the lending platforms which offer fiat loans in exchange for cryptocurrency. For example’s sake, let’s assume Dan takes a loan from BlockFi worth $2,500 after putting $5,000 worth of BTC as collateral.