Crypto lenders push no-tax perk of leveraging Bitcoin for cash

5 April, 2019 12:00 AM printer

NEW YORK: Former Wall Street trader Edgar Fernandez used some of his Bitcoin as collateral to borrow nearly $100,000 (Dh367,315), a move that let him keep his cryptocurrency and avert a tax bill on the newly acquired cash.

The tax perk stems from a long-standing principle that assets aren’t taxed until sold, much like borrowing against stock holdings. Yet digital currency carries far greater risks, from price volatility, to hacks and thefts that can make the collateral disappear, to sometimes shadowy players without long track records in the field, report agencies.

Since last fall, when the value of digital money plummeted, lenders have been pushing people who have paper profits to leverage them into cash by borrowing against their cryptocurrencies. And the fact that there’s no tax bill on the transactions is a big selling point. The US Internal Revenue Services treats crypto money as a capital asset like stocks or property, not as a currency.

Genesis Capital, a cryptocurrencies lender in New Jersey, says it handed out more than $1.1bn in cash loans and borrowed virtual cryptocurrencies in 2018. That total volume doubled in the last quarter of 2018 from the volume of the previous two quarters. Other lenders have also said they are doing more transactions, including Nexo, a cryptocurrencies lender that says it has lent $330 million since launching last April.

Swiss-based Nexo AG, which says it has affiliates in the US, the Cayman Islands and Estonia, conducts its cash loans out of London, according to co-founder and managing partner Antoni Trenchev, an ex-legislator from Bulgaria.

Experts call the digital-currency lending world a “Wild West” environment, because many of the lenders seem to pop up out of nowhere, have sprawling overseas affiliates, and can sometimes be opaque about where or how they store a borrower’s digital currency to keep it safe from hacking.

Even the lenders acknowledge it’s a risky bet.

Pat Larsen, the co-founder and chief executive of ZenLedger, said the dangers should be obvious. “It’s always risky to get a loan with a highly volatile asset,” he said.