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Cryptocurrency: Forced Liquidation of Collateral Crypto in a P2P Lending Platform

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XYZ is an onlin P2P crypto lending platform which connects potential crypto lenders and borrowers to each other via facilitating a lending marketplace. Users in this market are able to advertise they are crypto lenders or borrowers, and as such, they can specify certain conditions and criteria, such as what crypto is offered for lending, for how long, what crypto will be accepted as collateral and the rate of interest to be paid. So, for example, a lender might say they are willing to lend 1 BTC for a period of 6 month and they will accept ETH as security, with the interest rate being 15% per anum. Usually an LVR is also specified, meaning only up to a certain fraction of value of collateral (in dollar $$$) will be available for lending. For example,


Crypto-For-Lending                   Accepted-Collateral       Duration       Interest
--------------------------                  ---------------------------       ----------          --------
BTC                                                  ETC                        6 month           %15

 

If during the lending period, the price of the security crypto drops too much, more security must be added as collateral. Otherwise, there will be the risk of forced liquidation of the security. Adding more collateral means going to the web site and authorizing the platform to transfer the additional crypto from the borrower's wallet.


Once there is an offering on the marketplace, an interested party can take the offer, in which case a binding contract will be executed automatically using smart contracts, and as a result, the agreed collateral crypto will be  transferred from the borrower's wallet to the platform in order to be held in there, while at the same time, the lending crypto will be transferred from the lender's wallet to the borrower's wallet.

 

Lenders and borrowers have personal crypto wallets but they must have been given permission to access to their wallet during connection to the platform.


Here is what happened to me when used this website in the past:

 

  • On 14th of April: I borrowed 5 ETH (=lending crypto) while allowing 2600 ABC tokens (=collateral crypto) to be held as security for a period of three months.
  • On 26th of March: The value of ABC tokens fell sharply, triggering a margin call. I added 200 ABC tokens to my collateral, in order to prevent a forced liquidation.
  • on 11th of May: The value of ABC tokens dropped again but this time I didn't get the chance to add more security. As a result, most of my security crypto waere force liquidated and only 189 ABC tokens
    returned to my wallet as a result of exuting the smart contract.

 

I ended up keeping 5 ETH and losing (2600 + 200 - 189)= 2611 ABC tokens.

 

How should I put these gains/losses in my tax return?

 

Would it be correct if I said that I:

 

  • Disposed 2600 ABC tokens on 14th of April (for the total proceeds of, say, $1500
  • Acquired 5 ETH on 14th of April with the cost base equal to that of 2600 ABC tokens (= $1500)
  • Then disposed 200 ABC token on 26th March (for the total proceeds of whatever price was that day as per quote from reputable exchanges)
  • And then acquired 189 ABC tokens on 11th of May for the zero dollars ??

 

Would the above be correct?

 

Thanks!

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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 are going to check this out with our crypto specialists. 

 

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