Traders use cryptocurrency as a collateral to avoid capital gain taxes. They use crypto to secure loans which allow them to keep their respective bitcoin. In turn, they get cash because of which they can avoid the taxes. The crypto loan industry is flourishing with each day because of the option to use crypto loans.
In the market of cryptocurrency, regular ups and downs happen since the industry is established in the market. But it does not affect the lending industry. As per reports, the number of people using cryptocurrencies is increasing rapidly with bitcoin remaining the most popular one. Other cryptocurrencies like Ether are also doing well in the business. People use these cryptocurrencies as collateral to borrow money.
Former Wall Street trader uses bitcoin to borrow $100,000
As per reports, a former Wall Street trader whose name is Edgar Fernandez used his bitcoin to borrow about $100,000 as collateral. It helped him to keep his cryptocurrency and get cash in return. It also allowed him to avoid his capital gain taxes. This option gives the trader to trade on margin. It means the trader can do so by purchasing more cryptocurrencies. The trader can also pay off debt which has higher interest.
In the US, Internal revenue Service or IRS sees digital coins as capital assets like property; stocks bit not as currency. It can also see it as commodities in some cases. The US Securities and Exchange Commission or SEC and Commodity Futures Trading Commission or CFTC do not find the lenders as their subject. They do not see the lenders of such digital coins or cryptocurrencies to that same level of oversight.
It is important to apply to an asset when waiting for long term capital gains in the US. For instance, if a trader holds his or her bitcoin for a year or even more, the trader is eligible for long term capital gains. The trader can also avoid capital gain taxes.
Risks and Critical factors in the digital currency world
As a matter of fact, the critical factor arises when a trader uses a loan. It does not rest any long term caporal gains. It allows investors or traders to access cash. The lenders need to acquire about 20 percent to 60 percent more cryptocurrencies as collateral. It is important to protect them against the volatility of crypto. As per reports, loan amounts ranging from $500 to $2 million for one year has interest rates which vary to 16 percent from a few percentage points.
Sudden liquidation in the event of market cash can be one of the risks for these loans. If the cryptocurrency suddenly declines in its value, then that part of the crypto is liquidated. This liquidation happens in a margin call to maintain a ratio between collateral and debt. These things might occur due to the highly volatile nature of cryptocurrencies.
However, the industry of cryptocurrency lending is a profitable business in incredible amounts sometimes. An affiliate of Genesis Trading, Genesis capital, claims to handle over $1.1 billion in cash loans and it is against cryptocurrencies alone in the year 2018.