Taxes on Crypto-Backed Loans: What the IRS Rules Say and Don’t Say

One of the main reasons people borrow against bitcoin instead of selling it is tax. Coinbase’s blog puts it this way: borrowing instead of selling can help delay a tax gain or loss. That is broadly how platforms treat loans, but the IRS has published far less about loans than about sales. This guide separates what IRS guidance says from what lenders say, and flags the steps worth asking a tax professional about.

The starting point: crypto is property

For U.S. tax purposes the IRS treats digital assets as property, not currency. When you sell, exchange or otherwise dispose of a digital asset you held as a capital asset, you have a capital gain or loss: what you received minus your basis. The IRS says basis is generally what you paid in U.S. dollars, including fees, commissions and other acquisition costs. Bitcoin held for more than one year produces a long-term gain or loss; one year or less, a short-term one.

For 2026, Rev. Proc. 2025-32 sets the 0% long-term capital gains rate up to $49,450 of taxable income for single filers and $98,900 for joint filers. Net short-term gains are taxed as ordinary income.

What IRS guidance does not address

The IRS’s Frequently Asked Questions on Virtual Currency Transactions covers sales, exchanges, forks, gifts, donations and transfers between your own wallets. It does not include a question on crypto-backed loans, and the IRS digital assets page does not mention borrowing against crypto either. Coinbase says it will not treat your borrow transaction as a taxable event, and its help center tells borrowers to keep detailed records and consult a tax professional. That is Coinbase’s reporting position, not a ruling from the IRS.

Step by step

Step in a Coinbase loan	What the published rules say
Taking the loan (USDC received)	Coinbase says it will not treat the borrowing as a taxable event; no IRS FAQ addresses loans
Bitcoin converted 1:1 to cbBTC and moved to a smart contract	Not specifically addressed by IRS guidance; Coinbase tells its Canadian customers to ask a tax advisor about collateral wrapping and unwrapping
Moving crypto between your own wallets	Non-taxable, the IRS says, unless you pay a transaction fee with digital assets
Liquidation	Collateral is sold to repay the loan; a sale of digital assets is a disposition with a capital gain or loss
Repaying and getting collateral back	Ask a tax professional how the return of collateral is treated in your case

Liquidation is a sale

If your loan is liquidated, collateral is sold to repay what you owe. Under the IRS rules for digital assets, selling or otherwise disposing of them produces a gain or loss, measured against your basis in the units sold. That has two uncomfortable consequences. You may owe tax on a gain from bitcoin bought years ago at a lower price, even though the sale happened in a crash. And the cash from that sale went to the lender, not to you, so the tax has to be paid from other money.

Which units count as sold matters. The IRS lets you choose the units if you can specifically identify them and substantiate their basis; otherwise it applies first in, first out, starting with the earliest units you acquired. See Liquidation Risk Explained: What Happens When Your Collateral Is Sold for how a liquidation happens.

Forms you may see

• Form 1099-DA: for sales effected after 2025, brokers report gross proceeds for digital assets, and basis for those that are covered securities.
• Form 8949 and Schedule D: where you report sales and other dispositions of capital assets, including a liquidation.
• Form 1040: the digital asset question asks whether, during the year, you received a digital asset as a reward, award or payment, or sold, exchanged or otherwise disposed of one. The IRS says you must report digital asset transactions whether or not they result in a taxable gain or loss.

Records to keep

• Purchase dates, amounts and costs for the bitcoin you pledge, so its basis can be proved later.
• The date and amount of each borrowing and each repayment.
• Every collateral move, including additions and withdrawals.
• For a liquidation: units sold, price, date and the penalty charged.
• Statements and forms from the lender.

Selling outright has its own tax math, compared in Crypto Loans vs Selling Bitcoin: Comparing the Two Ways to Raise Cash. This guide is general information, not tax advice; rules for digital assets are changing, so check the IRS instructions for the year you file and talk to a tax professional.