In the United States, the IRS considers bitcoin property, and selling bitcoin is treated as a taxable disposition of property. Generally speaking, posting bitcoin as collateral and receiving a cash loan is not considered a taxable event. Standard tax rules and exclusion amounts apply to your use of the cash you receive from the loan.

Certain events within bitcoin-backed loans can have tax implications, including:

Using bitcoin for payments:

If you choose to use bitcoin to make loan payments, this is considered a sale of your bitcoin.

• Monthly interest: If you choose to pay your monthly interest (for Monthly Payment loans) from your bitcoin balance, sufficient bitcoin will be automatically sold to cover the payment.
• Payment at maturity: If you choose to make your final payment (for either Monthly Payment or Payment at Maturity loans), sufficient bitcoin collateral will be sold on your behalf to cover your outstanding amount.

Collateral liquidations:

Involuntary sales of your bitcoin collateral (liquidations) are also considered taxable events. These can occur in situations such as:

• Failure to make a payment: If you fail to make a loan payment, and the grace period expires, sufficient bitcoin collateral will be sold to cover the overdue amount plus a liquidation fee.
• Unresolved margin call: If you fail to resolve a margin call in time, sufficient bitcoin collateral will be sold to return your LTV to the recovery threshold.
• Reaching the liquidation threshold: If your LTV reaches the liquidation threshold at any time, sufficient bitcoin collateral will be immediately and automatically sold to return your LTV to the recovery threshold.

These bitcoin sales or liquidations will appear as a taxable disposition of bitcoin on your tax documents.