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Cryptocurrency: Credit Lines, Top-up and Force Liquidation of Collateral

Initiate

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Nexo.io is a platform for obtaining instant crypto loans. It will grant the clients a Crypto Credit in Digital Assets, assuming the client has provided the required Digital Assets as “Collateral” by transferring them into the Nexo Account. The value of the Crypto Credit is calculated by the loan-to-value (“LTV”) ratio against the value of the Collateral at the time of granting. The value of the Collateral is dynamically calculated by the platform in accordance with its applicable policy at the moment, on the basis of margin
percentages applied to the market value of the Collateral, according to an exchange ratio equivalent to the volume­ weighted average price of the relevant Digital Assets, across leading cryptocurrency exchanges.

 

The user is responsible at all times to maintain the necessary Collateral in accordance with the LTV.

 

While the Nexo Crypto Credit is outstanding, the platform acquires the ownership of the Collateral.

 

Also, a compound annual Interest commences accruing as of the start date of the Crypto Credit, which is calculated on a daily basis, on each calendar day, on the basis of the actual number of days elapsed in a 365-day year.

 

The Crypto Credit will be matured in a 12-month term starting from the Start Date. Unless terminated on the Maturity Date, the term of the Crypto Credit will be automatically extended for another 12-month term. (The number of extensions will be unlimited).

 

Obviosuly the borrowed credit should be repaid on the Maturity Date unless its term has been automatically extended. It can be repaid at any time prior to the Maturity Date and any amount.  All repayments are allocated first to the Interest and then to the principal of the platform's Crypto Credit.

 

Once the borrowed Credit has been repaid in full, all remaining Collateral will be transferred back to the Client’s Nexo Account.

 

There are certain events which, if occured, will constitute an Event of Default. In case of an Event of Default, the platform is entitled to realize all or part of the Collateral in accordance with the applicable contractual terms.

 

In above, I tried to explain how the platform works. The full list of T & C can be accessed on their website (https://nexo.io/credit-terms)


This is what happened when I used its services:

 

In January, I transfered several crypto to my Nexo account. Let's say the value of all my holdings in that account was ~ $2500. So I had a credit line of 50% of that amount (i.e. $1250) and could borrow up to $1250. I borrowed 1000 USDT.

In February, I transferred BTC and some ERC20 tokens to the platform in several different days (for example, on 1st, 5th, and 16th of the month). However, I didn't borrow anything until on 27th. On 27th, I borrowed 574 USDT.

In early march, I transferred some more BTC to my account in several different days, and then I borrowed 505 USDT.

 

Please note that, from the day I started using my credit line, the interest on the borrowing cryptos was started to accrue daily and showing in my account.

Later in March, however, the value of my crpto assets fell sharply, triggering a margin call, after which there was a forced liquidation of some of my BTC holding. As a result of this, 1670.90 USDT was repaid to the platform automatically.

 

Unfortunately I kept using the platform even after the loss described above. A few weeks later, I faced with even more forced liquidations as described below:

 

0.41476 ETH force liquidated and repaid 49.96 USDT borrowed
0.12764 ETH force liquidated and repaid 14.46 USDT borrowed
1.27915836 ETH force liquidated and repaid 135.46 USDT borrowed
......

The question is how should I put these into my tax return and what events in the above situation are important?

 

  • Transfering of cryptocurrency to my NEXO account ? (even if I still wasn't using the credit line)?
  •  Or should I say that I disposed of my cryptocurrency when I used some credit?  Lets' say I was entitled to getting a credit of 1250 USDT but only borrowed 1000 USDT. Then should I consider all of my holdings in the Nexo account to have been disposed of? or only part of it?
  • Would the interest paid be deductible?
  • If I said my BTC was disposed of when it was transferred it to the platform (or when I started using my Credit Line), then how do I explain that later it was force liquidated under different market conditions and with different prices?
  • Another question is, if I have a credit line of 1250 USDT available, and if I first borrow 1000 USDT and then 200 USDT, what will be the cost based of my newly acquired crypto? both will be 0? or equivalent to the price of all assets in Nexo account? or only the amount that was used as collateral?

 

It's really confusing situation for me. In retrospect, I whish I had never entered myself into such an unknwon territory.

 

My accountant has stated they would need a private ruling before they can lodge my tax return.

 

So I'm going to contact ATO regarding the above situation. However, I though it would probably be beneficial both to myself and to the community if I also post the question here.

 

Thanks in advance for any help!

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Most helpful response

Community Moderator

Replies 1

Hi @Taxpayer123456,

 

We have heard back from our specialist team on this, they'd like to you submit a request through early engagement so they can give you detailed advice.

 

Thanks, Nate

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Community Moderator

Replies 2

Hi @Taxpayer123456,

 

We will look into this one too.

Newbie

Replies 1

Interested to hear about this as well. My understanding is : 

1) Interest received daily from storing crypto on Nexo is income, with AUD value 

2) Interest from loan taken from using our collateral is deductible from income, with AUD value 

3) The cost base for the new crypto bought from using the loan is according to the market value at the time bought, not zero 

4) The total loan taken from Nexo doesn't matter with tax, just the interest as point number 2) 

5) The crypto we used as collateral for taking loans are still ours, as the value raised we still can opt to take the loan according the the maximum shown Loan-to-Value real time, as we do repayment with any amount any time, some collateral will be freed (there is no record of transaction what amount what crypto being locked --if there is more than one crypto in Nexo), in the end after repayment we will get all crypto freed... so there is no tax implication on this event, just the interest as point number 2), the more loan taken during the time the more interest charged 

6) The liquidation of collateral because of market crash triggers capital gain tax where cost base is as the market value at the time bought, and disposal is at the time the crypto liquidated

 

Are these correct?

Former Community Support

Replies 0

Hi @Eve20,

 

Due to the complex nature of the question, @Taxpayer123456 was encouraged to contact Early Engagement for tailored advice. This I think will apply to your follow-up questions, too. You can either lodge an advice request electronically, or request a call-back and chat to someone over the phone about your specific situation.

 

Let us know how this goes, and feel free to share with the Community once you've got your answers. Smiley Happy

Most helpful response

Community Moderator

Replies 1

Hi @Taxpayer123456,

 

We have heard back from our specialist team on this, they'd like to you submit a request through early engagement so they can give you detailed advice.

 

Thanks, Nate

Initiate

Replies 0

Hello @NateATO ,

 

Just so you and others know, I submitted an early engagement request back in Nov last year. I asked questions on different areas including questions regarding crypto loans which included this one. Note that in my communications I provided web links to these questions as well.

 

But then, the case offcier who was assigned to it, provided advice only for some of the other questions but nothing at all regarding my crypto loan questions (including this one). I sent another email and highlighted the unanswered questions. She still didn't provide an answer. Eventually she said (on the phone) that she couldn't provide advice beyond what was already provided and encouraged me to submit private ruling application if I wasn't happy with the advice. I sumbmitted a private ruling application on 9th April.

 

I still haven't heard back and so still no answer to this question. I'm wondering, why did your specialist team say they had an answer while in reality seems they did not?

I talked to an accountant about this situation and based on his experience, he stated ATO sometimes uses tactics like this to buy time. I hope he wasn't right! Note that I have two tax lodgments currently pending due to unclarity on this matter and my accountant refused to lodge my taxes just because of that. What is even more disappointing is that I receive letter after letter from ATO threatening me with penalities and actions and I just don't know what to do! I wish I had kept quiet about all these transaction like probably many other people do and in that case, I wouldn't have been experiencing pains like what I'm currently dealing with!