How some traders avoid bitcoin taxes using crypto loans

Some traders are using cryptocurrency as collateral to secure loans, allowing them to keep their bitcoin and get cash while avoiding capital gains tax.

The ups and downs that have been synonymous with the crypto market ever since its inception don't seem to affect the lending industry.

According to a report from Bloomberg, there has been a steady increase in the number of people using various cryptocurrencies, primarily bitcoin and ether, as collateral to borrow money.

If a trader holds their bitcoin for a year or more, then they are eligible for the substantially lower long-term capital gains rate instead of getting taxed at the short-term capital gains rate.

The critical factor: using loans does not reset the waiting period for long-term capital gains, allowing savvy investors to access the cash locked up in their investment.

If the underlying cryptocurrency suddenly becomes less valuable, then part of the crypto is liquidated in a margin call to maintain the ratio of collateral to debt.

Genesis Capital, an affiliate at Genesis Trading, said it handed out more than $1.1 billion in cash loans against cryptocurrencies in 2018 alone.

Many seemingly "Large" crypto lenders have popped out of nowhere, including BlockFi, Compound Finance, SALT Lending, and others.

Many of these lenders have sprawling overseas 'affiliates,' and can sometimes be opaque about where or how they store a borrower's digital currency-important details considering the prevalence of hacking, Bloomberg said.

Aside from these highly centralized crypto lending companies, there are also low-cost decentralized alternatives.