Crypto lending - where to report?

[Love2Bike]

I lended cryptocurrencies to a cousin.  Is there any place that I need to report that?  I am not collecting any interest on that, the agreement was he would just return the same amount of crypto after certain period of time.

Thanks in advance.

[DanP0428 · Accepted solution]

No, there is nothing to report.

[Love2Bike]

Back to my question.. so the crypto lending doesn't go by the same rule as fiat lending? Meaning there is no imputed interest by the AFR ruling? 

https://www.irs.gov/applicable-federal-rates

[GeorgeM777 · Accepted solution]

Correct.  Whether you chose to apply the Applicable Federal Rates, or some other rate of interest inputted or not, if you have received no income of any type in connection with lending the cryptocurrency to your cousin, there is nothing to report on your tax return.  Moreover, it appears your cousin would not report anything either, at least with regard to the cryptocurrency that was lent with the intention that it would be returned at a later time.  Based on your post, the cryptocurrency resembles a loan, and loans are not considered income because of the promise to repay in kind.  However, if the arrangement with your cousin should change, then there could be tax ramifications.  Additionally, should your cousin use or leverage the cryptocurrency to create income, then your cousin would need to report that income.   

@Love2Bike 

[Love2Bike]

Thank you very much for the clarification.  Yes, the assumption is that my cousin will generate some income on crypto he had borrowed since he is pretty savvy with it, but that's understandably on his side to report.

I just wanted to make sure that the AFR ruling does NOT apply in case of crypto lending from my side.   And just to make sure, that is also true in case of lending stablecoins (USDC for instance) in spite of them being pegged to a fiat, correct?

[GeorgeM777 · Accepted solution]

It's not clear whether the Applicable Federal Rate applies to the lending of cryptocurrency between family members.  Our prior post focused on the interest income received in connection with lending cryptocurrency and the fact that such income needed to be reported.  The AFR does apply to loans between family members when money is being loaned and the loan amount is over $10,000.  Thus, the issue is whether cryptocurrency is money as that term is used in connection with the AFR.  The IRS continues to characterize cryptocurrency as property, and thus, all of the rules that apply to the purchase/sale of property apply to cryptocurrency. 

To the extent the stable coins are the functional equivalent of money (fiat currency), then you could be in a situation where the AFR applies, and you would then need to charge your family member interest consistent with the AFR.  However, this issue, i.e., whether the AFR applies to cryptocurrency, is beyond the scope of the advice we can offer.  You should consider discussing this matter with your personal tax advisor.  

Whether the AFR applies to a loan of cryptocurrency between family members is one issue; however, the gift tax rules apply to money as well as property.  Thus, whatever tax position you take given your tax situation, you might consider making sure that the cryptocurrency you lent to your family member is not deemed a gift.  While it has at least some characteristics of being a loan, if it somehow were re-characterized as a gift, then the gift tax rules would apply.  Exceeding the annual gift tax threshold requires the filing of a gift tax return.  The gift tax threshold for 2022 is $16,000 and $17,000 for 2023. The threshold usually gets increased based on inflation every year, and it sometimes gets modified by changes to federal tax laws.  

@Love2Bike