You'll pay interest on the crypto you borrow in most instances. Paying interest in fiat currency is not a taxable event. Paying interest in crypto may be subject to Capital Gains Tax and it could be viewed as spending your crypto. If you're taking out a loan for personal use - loan interest is not tax deductible.
Interest received on loaning crypto is treated as ordinary Income and taxed at applicable income tax bracket rates. Example: Andrew loans USDC $1,000 for 1 year. He earns $10.05 as an Interest Income.
There is likely no taxable activity when you borrow cryptocurrency or make a repayment on a loan. You will, however, incur capital gains or losses when you dispose of any borrowed crypto assets.
Some of the most popular ways crypto investors earn using DeFi is through staking, yield farming and liquidity mining. DeFi transactions will be taxed as income or as a capital gain depending on where you live.
The most common use of crypto is as an investment, in which case the crypto asset is a capital gains tax (CGT) asset. If you acquire a crypto asset as an investment, transactions such as disposal or exchange or swap are a CGT event and you may make a: capital gain. capital loss, which can reduce capital gains you make.
One of the ways you can reduce this taxation is to HODL. Australian investors who hold assets for longer than a year enjoy a 50% long-term Capital Gains Tax discount when they sell, swap, spend, or gift them.
That means the ATO has the 'know your customer' (KYC) information you provided when signing up for any Australian exchange or wallet. This includes personal information and transaction data like: Names.
The advantages of doing so through DeFi lending platforms is that as a borrower you are not handing over custody of your collateral to an institution where you might face counterparty risk (instead you face a different protocol risk).
Wrapped or bridged tokens are subject to the same tax regulations as other cryptocurrencies. In the United States, crypto is considered property and can be subject to income and capital gains tax.
The ATO rarely views Bitcoin & other cryptocurrencies as currency or money. Instead, for the purposes of tax they class cryptocurrency as property. As such, trading falls under the Capital Gains Tax (CGT) regime. This includes all cryptocurrency coins, NFTs, tokens & stablecoins.
2022 Update to Cryptocurrency Capital Gains Taxes
On October 25, 2022, The Australian Taxation Office released 2022-23 budget papers stating that crypto transactions will be taxed as an asset rather than as a foreign currency. Central Bank Digital Currencies (CBDCs), however, will still be taxed as foreign currency.
A crypto loan is a type of secured loan in which your crypto holdings are used as collateral in exchange for liquidity from a lender that you'll pay back in installments. As long as you make your payments and pay the loan amount in full, you get your crypto back at the end of the loan term.
Do you need to report crypto interest? Yes. Cryptocurrency interest is considered ordinary income subject to income tax.
If you stake cryptocurrencies
You treat staking income the same as you do mining income: counted as fair market value at the time you earn the income and subject to income and possibly self employment taxes.
Crypto lending is super safe, at least in theory. Whatever you deposit to the lending platform is taken by a borrower – who must provide at least 100% collateral for the loan. And as I mentioned earlier, there are even cases where the platform requires a 150% collateral ratio.
In crypto lending, deposits are not insured by any federal deposit insurance, and you might lose all your money if the platform provider goes insolvent.
Investing in DeFi protocols comes with higher yield opportunities than traditional finance, but also comes with greater risks, such as smart contract vulnerabilities, liquidity risk, and market volatility.
If a borrower defaults on a flash loan, however, the smart contract will cancel the transaction and return the funds to the lender. As for DeFi lending, users have to provide collateral to get a crypto loan.
This enables you to get the money without having to sell your coins, use the cash to fulfill your objectives and then repay to get back the hold on your assets. Crypto loans allow you to use digital assets you hold to generate dividends by lending out part or whole of the holdings.
This platform enables depositors to lend its native stablecoin, DAI, and earn interest as they would with a centralised bank. Maker generates revenue via its stability fee which is the interest charged to borrowers, as well as taking a cut on every liquidation.
Your Australian bank account statements are accessible to the ATO. The ATO is endowed with extensive legal authority, which allows it to access your personal bank information. Because of these capabilities, the ATO is able to get your Australian bank statements straight from your financial institution.
The ATO taxes cryptocurrency as a “capital gains tax (CGT) asset”. This means you must declare the transactions (on your tax return) for every time you traded, sold, or used crypto. The ATO does not see crypto as money, and they don't class it as a foreign currency.
If you only bought but didn't sell crypto during the year, electing to hold it in a wallet or on a crypto platform, you won't owe any taxes on the purchase. Much like you wouldn't owe taxes for buying and holding stocks for your portfolio.