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Re: Cryptocurrency: Crypto loan in the form of purchase and repurchase

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Offering a crypto loan means providing instant loan in the form of crypto, stable coins (such as USDT),  or even cash, in return for getting paid via receiving interest money. Needless to say, the borrowed crypto (= the "prinicpal"), has to be returned to the lender in full by the end of the lending period. Usually the lender requests the borrower to put another cryptocurrency as "collateral" security for the duration of lending so that the lender is covered in case of default by the borrower. The value of collatral is usually more that the amount of the borrowed crypto (for example, 1.4 times or 2 times more).


At the end of the lending period, the collateral is returned from the lender to the borrower, provided that both the borrowed crypto as well as the charged interest are paid to them by the borrower. The collateral may also be released upon request by the borrower, should they wish to terminate the laon agreement early (in which case they must pay both principal and interest before the "maturity" of the loan). A forced liquidation of collateral may also happen due to volatile conditions in the market and the inability by the borrower to provide more collateral as security. In this case, some or all of the collateral will be permanently given to the lender in order to recover the expenses of lending crypto to the borrower.


Having said that, different lenders treat crypto loans differently.


So far as this question is concerned, I dealt with a company that explicitely treated crypto loans as agreements of "purchase" and "re-purchae". This is best explained by an example as follows. I took a crypto loan in which I agreed that:

 

  • 2913 XLM (="collateral" by the borrower/I) would be purchased for the agreed price of 165 USD by the lender
  • The borrower/I had the right to "repurchase" the above tokens within a timeframe of 120 days
  • Agreed repurchase price was 186 USD
  • 2913 XLM would be returned to me once the repurchase was complete

 

Effectively, this meant that I would be borrowing 165 USD for the duration of 120 days while putting 2913 XLM as collateral . The XLM tokens would be returned to me once I paid 186 USD during or at the end of the 120 days period.

 

The purchase price of 165 USD offered by the lender was determined by the LVR (loan-to-value ratio) of the loan. For example, an LVR of 50% meant the lender would pay only 50% of the market value of the collateral (which was 2913 XLM in this example).


I, the borrower, could then use the proceeds of that purchase in any way they I wanted. However, I had to pay 186 USD within a timeframe of 120 days in order to get my XLM cryptos back.

 

This effectively meant paying 21 USD in interests (because 186 USD - 165 USD = 21 USD)

 

Would it be correct if I said this:

 

  • On the start Date of the contract:     I Sold (disposed) 2913 XLM for the proceeds of 165 USD
  • On the end Date of the contract:      I Bought (acquired) 2913 XLM for the cost of 186.83 USD


You will notice that in representing the example borrowing this way, the fact that 21 USD was paid as interest is kind of "hidden". (which may or may not be a matter of improtance)

 

Having said that, I am actually more concerned that ATO might say to me that 2913 XLM on that particular day was worth ~330 USD and not 165 USD. Note that 2913 XLM was purchased by the lender for the "agreed" price of 165 USD becuase LVR of the loan was equal to 50%.

 

So what is the right way of putting these into my tax return?

 

 

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Most helpful response

Community Moderator

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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

2 REPLIES 2

Community Moderator

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Hi,

 

We will check this one out too.

 

Most helpful response

Community Moderator

Replies 0

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