Cryptocurrency lending is an increasingly popular aspect of the DeFi space, offering users opportunities to earn interest on their digital assets. However, the nature of lending transactions, particularly deposits and withdrawals, can be complex from a tax perspective. This in-depth guide provides a detailed overview of how users can leverage CoinTracker to manage these transactions, distinguishing between liquid and illiquid versions of lending activities.
If you are looking for how to change the default tax treatment for lending transactions, then please review this guide: How to Change the Default Tax Treatment for Lending Transactions
Understanding Lending Deposits and Withdrawals
In cryptocurrency lending, users can deposit their digital assets into a lending platform as collateral (sometimes receiving a representative token in return) in order to earn a rate of return. These transactions can be categorized as either liquid or illiquid:
- Liquid Lending Transactions: These involve the deposit or withdrawal of assets in exchange for a representative token that remains tradable or liquid.
- Illiquid Lending Transactions: In these cases, the deposited assets are locked and cannot be traded until they are withdrawn.
Categorizing Lending Transactions in CoinTracker
CoinTracker has two categories, Lending Deposit and Lending Withdrawal, to help users accurately record these transactions. Depending on their nature, these transactions can be classified as follows:
- Lending Deposit: Can be a trade (for liquid lending) or a send (for illiquid lending).
- Lending Withdrawal: Can be a trade (for liquid lending) or a receive (for illiquid lending).
How to Categorize from the Transactions Page
Learn how to change the category for a transaction on the Transactions page here: How to Change a Transaction Category
How to Categorize in a CoinTracker CSV
If importing transactions via a CoinTracker CSV you can use these tags to categorize the transaction:
- lending_withdrawal
- lending_deposit
Tax Treatment for Lending Transactions
Liquid Lending Transactions
By default, transactions categorized as lending deposits or lending withdrawals for liquid lending are treated as taxable like any other trade.
Users have the option to configure if these transactions should be treated as non-taxable. See how here: How to Change the Default Tax Treatment for Lending Transactions
When marked as non-taxable:
- The cost basis transfers (plus the fee) from the outgoing token (lending deposit) to the incoming token (lending withdrawal).
- As an example:
- Let’s say we purchased ETH on 12/08/2022 and then did two lending deposits on 06/08/2022:
- The acquired date of aArbWETH, a liquid lending token, would be 12/08/2022—the same date as the ETH was purchased
- Later we facilitated two lending withdrawals on 12/08/2023 and sold the retrieved ETH the same day:
- The date acquired for ETH remains 12/08/2022.
- Let’s say we purchased ETH on 12/08/2022 and then did two lending deposits on 06/08/2022:
Illiquid Lending Transactions
Illiquid lending deposit transactions appear as Send (outgoing) transactions and are treated as non-taxable by default.
Missing Balance Error When Related to Lending Transactions
CoinTracker will flag a Missing Balance error where a user tags a transaction as Lending Withdrawal without a corresponding Lending Deposit balance:
Should this occur, see How to Resolve Transactions With 'Missing Balance' for more information.
This error will guide you to either locate and tag the corresponding Lending Deposit transaction or to split any interest income from the principal amount.
Note: transactions that cannot be matched with a lending deposit will be assigned a cost basis of $0.
Disclaimer: Please note that this information is for informational purposes only and should not be taken as legal, tax, audit, accounting, or brokerage advice. Users should consult with a tax professional for specific guidance.