Captain’s note
- The IRS treats digital assets as property, so selling bitcoin for dollars is a disposition that produces a capital gain or loss.
- For 2026 the 0% long-term capital gains rate applies up to $49,450 of taxable income for single filers and $98,900 for joint filers.
- Coinbase says it will not treat the borrow transaction as a taxable event; a liquidation, however, sells your collateral.
Coinbase’s marketing for its crypto-backed loans makes a simple pitch: get cash without selling your crypto. Sometimes that is exactly the right move. Sometimes it turns a clean, planned sale into an expensive, unplanned one. The difference comes down to three things: your tax position, how quickly you can repay, and how much room the loan has before liquidation.
Side by side
| Sell bitcoin | Borrow against bitcoin | |
|---|---|---|
| Cash today | Yes, the sale proceeds | Yes, the loan (USDC on Coinbase) |
| Tax now | Capital gain or loss on the sale | Coinbase says it will not treat the borrowing as a taxable event |
| Ongoing cost | None | Interest, plus fees added to the principal |
| Keep the upside | No, for the bitcoin you sold | Yes, while the loan is open |
| Price risk | Gone, for the bitcoin you sold | Doubled: a falling price can force a sale at the worst time |
| Paperwork | Form 8949 for the sale | Records of the loan, collateral moves and any liquidation |
What selling costs
The IRS treats digital assets as property, not currency. Selling bitcoin for dollars is a disposition: the gain or loss is what you receive minus your basis, which the IRS says is generally what you paid in dollars, including fees and commissions. If you held the bitcoin for more than one year, the gain is long-term.
Long-term gains get lower rates. For 2026 the 0% rate applies up to $49,450 of taxable income for single filers and $98,900 for joint filers, under Rev. Proc. 2025-32; above those amounts most long-term gains are taxed at 15% until a higher threshold where 20% begins. Gains on bitcoin held one year or less are short-term and taxed like ordinary income. The full rules are in Taxes on Crypto-Backed Loans: What the IRS Rules Say and Don’t Say.
Two details can make a sale cheaper than people expect. You can choose which units you sell, if you can specifically identify them and substantiate their basis; otherwise the IRS applies first in, first out. And a sale at a loss can offset other gains. Selling is not automatically the expensive option.
What borrowing costs
A loan replaces the tax bill with a running cost. On Coinbase that means interest, either variable and set by an onchain market or fixed for a term, a one-time processing fee added to the principal each time you borrow, and possibly a platform fee inside the rate. The details are in Interest Rates on Crypto Loans: Variable, Fixed and the Fees on Top.
The bigger cost is the one you hope never to pay. If bitcoin falls far enough that your loan-to-value reaches the liquidation threshold, 86% for bitcoin on Coinbase, the collateral is sold automatically to repay the loan and a 4.38% penalty is included. You have then sold bitcoin anyway, at a low price, paid a penalty, and still have a taxable disposition to report.
When each tends to fit
Borrowing can fit
- A short, defined need, such as bridging a few weeks until other money arrives, with a clear source of repayment.
- A small loan relative to the collateral, so that the liquidation price is far below today’s price.
- Bitcoin held one year or less that you were going to keep anyway, where a sale now would produce a short-term gain.
Selling can fit
- You need the money for good, with no realistic plan to repay.
- Your taxable income is low enough that long-term gains fall in the 0% bracket.
- You have bitcoin that is worth less than you paid, so a sale produces a loss rather than a gain.
- You would lose sleep over a liquidation price; a loan is a position that has to be watched.
Tip: Run both numbers before deciding: the tax on a sale today, and a year of interest and fees on a loan of the same size. Then ask what happens to the loan if bitcoin drops by half.
Records to keep either way
Whichever you choose, the IRS expects records of every purchase, sale, exchange or other disposition of digital assets, and of the dollar value of anything received as income. Coinbase’s help center gives borrowers the same advice: maintain detailed transaction records and consult a tax professional. For a loan, that means the date and amount borrowed, each collateral move, every repayment, and the details of any liquidation, including how many units were sold and at what price. A liquidation years from now is much easier to report if the purchase records for that bitcoin still exist.
The worst of both
The outcome to avoid is borrowing near the maximum, leaving the loan open without paying interest, and being liquidated in a sharp drop. Coinbase’s own help pages warn that market volatility and technical issues can result in liquidation even with loan protection switched on. If you borrow, borrow small and keep a plan to repay; if you cannot, selling may be the more conservative choice. Talk to a tax professional before a large sale or loan, and see Liquidation Risk Explained: What Happens When Your Collateral Is Sold for how the forced-sale scenario unfolds.