Are crypto loans taxable? Collateral and liquidation

By Crypto Loans HQ Published 19 September 2026 Last reviewed 19 September 2026

Are crypto loans taxable? Loan proceeds are generally not income, because you must repay them, and in many jurisdictions pledging bitcoin as collateral is not itself a disposal. Two events change that: a liquidation, which is a sale of your collateral, and loan terms that pass ownership of the collateral to the lender. The IRS has published no guidance on crypto collateral either way.

Key takeaways

The IRS has not ruled on crypto loans. Notice 2014-21, the 46 virtual currency FAQs and the digital assets page say nothing about loans, collateral or liquidation.
A liquidation is a sale. Any gain is taxable, while the proceeds go to the lender.
In the UK the test is beneficial ownership. HMRC’s CRYPTO61640 treats a platform’s right to deal with collateral “as it wishes” as a strong indicator of a disposal.
Securities-lending relief does not reach crypto in the US or UK guidance.
Interest follows the use of the money, not the collateral. See 26 CFR 1.163-8T in the US and CRA Folio S3-F6-C1 in Canada.

General information, not tax advice. This guide summarizes published guidance as read on 19 September 2026. It is not tax, legal or investment advice, and not an offer to lend or to arrange a loan. Treatment depends on where you are taxed, your circumstances and the exact loan terms, and guidance changes. Take advice from a qualified tax adviser before you borrow against, or sell, a crypto asset. How we are paid.

Why the loan itself is usually not taxed

Two different things happen when you borrow against bitcoin. You receive money, and you hand bitcoin to a lender or its custodian as security. The tax answer is different for each.

The money is the simpler part. Loan proceeds are generally not income, because you owe them back. In the US the principle comes from case law, not from crypto guidance: in Commissioner v. Tufts (1983) the Supreme Court said that because of the obligation to repay, “the loan proceeds do not qualify as income to the taxpayer.” Tufts is about loan proceeds. It does not decide what happens to the collateral.

The collateral is the harder part: do you still own the bitcoin, for tax purposes, once the lender holds it? HMRC answers by asking whether beneficial ownership has passed. The IRS and the Canada Revenue Agency have published nothing on the point, and the ATO’s pages would not open to us.

What the IRS has and has not said

The IRS treats digital assets as property, not currency. IRS Notice 2014-21 says that general tax principles for property transactions apply, and the IRS virtual currency FAQs say that when you sell virtual currency, “you must recognize any capital gain or loss on the sale.”

What the IRS has not said matters more to a borrower. On 19 September 2026 we searched Notice 2014-21, all 46 of the virtual currency FAQs (last reviewed 30 June 2026) and the IRS digital assets page for loans, borrowing, lending, collateral, margin and liquidation. None of the three addresses them. The IRS has published no guidance saying that borrowing against crypto is, or is not, a taxable event, and none on whether handing crypto to a lender that may rehypothecate it is a disposition.

The securities-lending rule does not settle it by analogy. Section 1058 of the Internal Revenue Code lets qualifying loans of securities pass without gain or loss, but it applies to “securities (as defined in section 1236(c))” and does not mention digital assets. The IRS has issued no crypto equivalent.

Reporting has moved on even though the substance has not. Brokers report gross proceeds on Form 1099-DA from 2025 and basis for certain transactions from 2026, and the IRS says that “whether or not you receive a Form 1099-DA, you must report all income, gains and losses from digital asset transactions” (Understanding your Form 1099-DA). A liquidation is a sale of your bitcoin, and a sale is generally a taxable event.

The UK: HMRC’s collateral test

HMRC is the only one of the four whose guidance speaks to crypto collateral directly: CRYPTO61640, in the CRYPTO61000 series of the Cryptoassets Manual (updated 28 November 2025). It is written for DeFi lending platforms, so applying it to a centralized lender is an inference your adviser should confirm.

The test is beneficial ownership. HMRC says that where a platform “is allowed to deal as it wishes with the tokens received as collateral”, that is a strong indicator it has acquired beneficial ownership, which makes posting the collateral a disposal. Where the platform “is specifically restricted from dealing with the tokens received as collateral”, that is a strong indicator it has not, and there is no disposal.

On a liquidation, HMRC treats the platform as your nominee under section 26 of the Taxation of Chargeable Gains Act 1992, so “any gain or loss on a disposal of the tokens held as collateral by the DeFi lending platform is deemed to be the gain or loss of the borrower.” Tokens the platform takes as a penalty are not allowable expenditure under section 38.

At CRYPTO61610, HMRC says tokens will generally not be securities for the repo and stock-lending rules in sections 263A and 263B. A “no gain, no loss” treatment of crypto collateral appears in the government’s summary of consultation responses (updated 26 November 2025), but only as a proposal still being assessed. It is not law.

Where a disposal does happen, capital gains tax applies in the normal way. For individuals in 2026 to 2027, the annual exempt amount is £3,000, and gains are taxed at 18% within the basic-rate band and 24% above it (GOV.UK).

Australia and Canada

Australia. Every ato.gov.au address we tried returned HTTP 403, on 19 and again on 20 September 2026, so nothing here is quoted from the ATO and the links below may need a browser. What law-firm commentary reports is that the ATO treats selling a crypto asset, gifting it, trading or swapping it and converting it to currency as disposals that trigger capital gains tax. A liquidation converts your crypto to currency, so it sits in that list.

Beyond that, this page states nothing about how the ATO treats crypto posted as collateral for a fiat loan, because we could not verify it. On wrapping, commentary reports a draft determination, TD 2026/D2, comments closed 18 September 2026, taking the preliminary view that CGT event C2 happens when a crypto asset is wrapped and again when it is unwrapped. A draft is not law and can change. Ask your adviser.

Canada. The Canada Revenue Agency lists trading or exchanging crypto for government-issued currency or another crypto-asset, using it to buy goods or services, and giving it away as dispositions (Reporting income from crypto-asset transactions, modified 2 December 2025). On capital account, half of a capital gain is included in income. The page does not mention loans, collateral or liquidation.

One Canadian detail matters to borrowers. Whether a gain is capital or business income depends on the facts, and the CRA names financing crypto purchases “by some form of debt” as one factor pointing to business activity. Borrowing against crypto to buy more crypto is the pattern that factor describes.

The four authorities side by side

“Not addressed” means the crypto guidance we read is silent, not that no tax is due.

Crypto loan tax events: what each authority has published
Event	US (IRS)	UK (HMRC)	Australia (ATO)	Canada (CRA)
Receiving the loan	Loan proceeds are not income (Commissioner v. Tufts, case law)	Not addressed in the crypto guidance	Not addressed in the crypto guidance	Not addressed in the crypto guidance
Posting collateral	No guidance	Disposal if the platform may deal with it as it wishes; none if specifically restricted (CRYPTO61640, written for DeFi)	Not verified — ATO pages could not be read	Not addressed
Liquidation	A sale: capital gain or loss (general rule, FAQ Q4)	Gain or loss deemed the borrower’s (CRYPTO61640)	Converting crypto to currency is a CGT event (general list, reported)	Exchanging crypto for currency is a disposition (general list)
Securities-lending relief	§1058 covers securities; digital assets not mentioned	Tokens generally not securities for s263A and s263B (CRYPTO61610)	Not verified — ATO pages could not be read	Not addressed
Interest	Allocated by use of the proceeds, not the collateral (26 CFR 1.163-8T)	Not summarized here	Not summarized here	Security has no impact; the use of the money decides (Folio S3-F6-C1, ¶1.92)
Sources: the IRS, HMRC and CRA documents linked on this page, read on 19 September 2026. The ATO’s own pages returned HTTP 403 to us, so the Australia column records only what secondary commentary reports. General information, not tax advice.

Liquidation: a taxable sale without the cash

A liquidation is the event that most often turns a crypto loan into a tax bill. When a price fall pushes the loan-to-value (LTV) ratio, the loan balance divided by the market value of the collateral, past the lender’s liquidation threshold, the lender sells some or all of the collateral and applies the proceeds to the debt. HMRC’s guidance treats that as your disposal directly; in the US, Australia and Canada the general rule for a sale applies.

Some lenders publish that they sell only enough to restore a target LTV; others sell enough to repay the whole balance. Either way the proceeds go to the lender. How bitcoin loan margin calls are triggered and cured has its own guide. A sale you choose is different: a voluntary disposal at size, including one by an executor, is covered in sell bitcoin OTC.

Worked example

You bought 10 bitcoin at US$20,000 each, a cost basis of US$200,000. When bitcoin was US$100,000 you borrowed US$500,000 against all 10, an LTV of 50%. The price falls to US$62,500, the LTV reaches 80%, and the lender (in this example) sells 8 bitcoin to repay the loan in full.

You receive no cash: the US$500,000 clears the debt. But you have disposed of 8 bitcoin with a basis of US$160,000 for US$500,000, a gain of US$340,000 before fees and interest, on a sale you did not choose. The tax must be paid from other money. Figures are illustrative; which units count as sold depends on the cost-basis rules where you are taxed.

Risk

Tax risks in a crypto-backed loan

Margin calls and forced liquidation. A price fall can trigger a margin call and then a forced sale. The sale is a disposal for tax, and the proceeds repay the lender.
Custody and rehypothecation. Terms that let the lender rehypothecate, lend or sell the collateral point, under HMRC’s test, to a disposal when you post it.
Counterparty insolvency. The Celsius court held on 9 November 2023 that collateral posted under its retail loan terms by objecting borrowers was property of the estate. How a loss of collateral is treated for tax is a further question for your adviser.

What happens to collateral while a lender holds it is covered in bitcoin loan rehypothecation and custody.

Loan terms that can change the answer

The same loan can carry different tax consequences depending on the contract. Three clauses deserve a close reading.

Rights to use the collateral. Celsius’s retail loan terms, as quoted by the bankruptcy court, let it “pledge, re-pledge, hypothecate, rehypothecate, sell, lend, or otherwise transfer or use” pledged assets “with all attendant rights of ownership”. Under HMRC’s DeFi test, rights like these point to a disposal when you post the collateral.
Conversion into another token. Some products convert bitcoin into a wrapped or tokenized version. In Australia a draft determination, TD 2026/D2, takes the preliminary view that wrapping is CGT event C2; elsewhere, ask whether the conversion is itself a disposal.
Restrictions on the lender. Terms that specifically restrict the lender from dealing with the collateral point to no disposal. A segregated account or a multisig address the lender cannot move alone may support that reading, but HMRC’s test reads the terms.

Is the interest deductible?

The use of the money decides that, not the collateral. US Treasury regulations allocate debt “by tracing disbursements of the debt proceeds to specific expenditures”, and the allocation “is not affected by the use of an interest in any property to secure the repayment of such debt” (26 CFR 1.163-8T). What you spend the money on classifies the interest.

Three consequences follow under section 163 of the Internal Revenue Code. Personal interest is not deductible for individuals. Investment interest is deductible only up to net investment income (IRS Topic 505). And home-mortgage acquisition debt must be “secured by such residence”, so a loan secured only on bitcoin does not qualify even if the money buys a home.

Canada applies the same idea. The CRA’s Income Tax Folio S3-F6-C1 says that “the nature of the security provided in connection with borrowed money” has no impact on the tests for interest deductibility (paragraph 1.92). We have not summarized the UK or Australian rules on interest here.

Questions for your tax adviser

The answers sit in the loan agreement, so take it to your adviser before you sign.

Under the terms, who holds beneficial ownership of the collateral, and may the lender rehypothecate, lend or sell it?
Is the bitcoin converted, wrapped or moved into a pooled wallet at any point?
On a liquidation, does the lender sell enough to restore a target LTV or enough to repay the whole balance, and what fee does it charge?
Which units will be treated as sold, and what is their cost basis?
What will the money be used for, and does that make any of the interest deductible?
If the lender becomes insolvent, how would a loss of the collateral be treated?

Whether to borrow at all is a separate decision from how it is taxed. The comparison of the two routes is in borrow against bitcoin instead of selling, and the loan itself is explained in how do crypto loans work.

Primary sources

IRS: Notice 2014-21; virtual currency FAQs; digital assets; Topic 505, interest expense
US law (Cornell LII): Commissioner v. Tufts, 461 U.S. 300; 26 U.S.C. §1058; 26 U.S.C. §163; 26 CFR 1.163-8T
HMRC Cryptoassets Manual: CRYPTO61640; CRYPTO61610; CRYPTO22100 (updated 28 November 2025)
ATO (both returned HTTP 403 to us; open them in a browser): decentralised finance and wrapping crypto; crypto asset transactions
CRA: reporting income from crypto-asset transactions; Folio S3-F6-C1, interest deductibility
In re Celsius Network LLC, No. 22-10964 (MG), opinion of 9 November 2023 (Bankr. S.D.N.Y.)

Crypto loan tax: frequently asked questions

Is borrowing against bitcoin a taxable event in the US?

The IRS has not said. Notice 2014-21, its 46 virtual currency FAQs and its digital assets page do not address loans, collateral or liquidation. Loan proceeds are generally not income because they must be repaid, a principle from the Supreme Court case Commissioner v. Tufts (1983). A liquidation of the collateral is a sale, and a sale of digital assets generally produces a capital gain or loss.

Is a crypto loan liquidation taxable?

Generally, yes. A liquidation sells your collateral for currency, and the IRS, the Canada Revenue Agency and the Australian Taxation Office each treat a sale of crypto for currency as a taxable disposal. HMRC's guidance on DeFi collateral says any gain or loss on the platform's disposal of the collateral is deemed to be the borrower's. The sale proceeds go to the lender, so any tax is paid from other money.

Is the interest on a crypto-backed loan deductible?

That depends on what the money is used for, not on the collateral. US regulations allocate interest by tracing the use of the loan proceeds, personal interest is not deductible for individuals, and investment interest is deductible only up to net investment income. In Canada, the Canada Revenue Agency says the security given for a loan has no impact on the tests for interest deductibility.