Is a Crypto-Backed Loan a Taxable Event? US and UK, Step by Step

"A loan is not a sale, so it is not taxed" is the sentence that sells crypto-backed loans. It is true often enough to be dangerous. A crypto loan has five steps, and whether each one is taxable depends on the contract, the jurisdiction and what happens to the collateral. This article takes the five steps in order for US and UK taxpayers, states what the rules say, and marks where the rules run out.

It is a map, not advice. Arvexo is a lender, not a tax adviser. The rates and examples are illustrative. Speak to a qualified adviser about your own position before borrowing.

The five steps

1. You transfer collateral to the lender.
2. You receive the loan.
3. You pay interest.
4. Something happens to the collateral mid-loan: a top-up, a withdrawal, or a liquidation.
5. You repay and the collateral is returned.

Step 1: posting collateral

United States. The general principle is that a loan is not income because there is an obligation to repay. [1] A transfer of collateral to secure a loan is, in most ordinary cases, not a disposal of the collateral. The complication is contract design: if the agreement transfers ownership of the crypto to the lender, with an obligation to return equivalent assets, a disposal argument becomes possible. IRS Notice 2024-57 describes certain digital-asset "lending" transactions for broker-reporting purposes and states that its descriptions do not determine their substantive tax treatment. [2] There is, as of this article's review, no IRS ruling that says every crypto-collateral transfer is tax-free. Keep the agreement; the words in it matter.

United Kingdom. HMRC's Cryptoassets Manual addresses collateral in DeFi arrangements directly. Its position: if the platform is free to deal with the collateral, that is a strong indicator that beneficial ownership has transferred, and the transfer is a disposal for capital gains tax. If the platform's use of the collateral is restricted and the borrower retains beneficial ownership, posting collateral is not a disposal. [3] The manual is written for DeFi, and HMRC has not said it applies unchanged to every centralised lender, but it is the clearest statement of the test: who can deal with the asset?

Arvexo's published terms state that collateral is held in custody and not lent out; whether that is sufficient for a particular taxpayer is a question for their adviser, reading the agreement.

A dated development: on 13 July 2026 HMRC announced a measure for certain cryptoasset lending and liquidity-pool arrangements, with effect from 6 April 2027, providing no-gain/no-loss treatment in specified circumstances. [4] It is a future regime, not a current exemption, and its scope should be checked against the actual product before assuming it applies.

Step 2: receiving the loan

US. Loan proceeds are not income. [1] No tax on receipt.

UK. Same. Borrowed money is not income or a gain.

The one caveat in both: if the arrangement is recharacterised as a sale of the collateral (because title passed and the "loan" is really the price), then the proceeds are sale proceeds. That is step 1's question showing up again.

Step 3: paying interest

US. Interest on a personal loan is generally not deductible. Interest on a loan used to buy or carry investments may be deductible as investment interest expense, subject to limits; interest on a loan used in a trade or business may be deductible as a business expense. The purpose of the loan decides it. Keep records of what the funds were used for. [5]

UK. Interest on a personal loan is not deductible against income. Specific reliefs exist for loans used for certain business purposes. Paying interest in crypto rather than cash is itself a disposal of the crypto used to pay. [3]

Step 4: events mid-loan

Adding collateral. Same analysis as step 1 for the new collateral.

Withdrawing excess collateral. Not a disposal if you never disposed of it. If title had passed, the return is the reverse leg of whatever the original transfer was.

Liquidation. This is the step borrowers forget. A liquidation is a sale of your collateral. In the US, a sale of a digital asset is a taxable event: gain or loss is recognised against your basis in the coins sold, whether you pressed the button or the lender did. [6] In the UK, HMRC's manual says that where the borrower retains beneficial ownership, a later sale of the collateral by the platform is the borrower's disposal. [3] A forced sale at a low price can produce a gain if your basis is lower still, which means a tax bill in the same month the loan went wrong.

Interest capitalised after a missed payment. Arvexo adds unpaid interest to the balance. [7] That is a larger debt, not a taxable event in itself.

Step 5: repaying and release

US and UK. Repaying a loan is not a taxable event. Getting your collateral back is not a taxable event, provided you never disposed of it.

The way you raise the money to repay can be. Selling crypto to repay, including selling some of the collateral at maturity, is a sale. The gain is taxable. [6] "Borrow rather than sell to avoid tax" works only while the loan is open; the sale deferred is not a sale avoided. Borrowing vs selling runs the numbers.

Debt forgiven or written off. If a liquidation leaves a shortfall and the lender writes it off, US law may treat the cancelled debt as income. [8] Check the agreement for shortfall liability before borrowing.

The table

• Post collateral: US: Generally not taxable; depends on whether title passes; UK: Not a disposal if you keep beneficial ownership; a disposal if the platform can deal freely with it
• Receive loan: US: Not income; UK: Not income
• Pay interest: US: Not deductible personally; may be if investment or business use; UK: Not deductible personally; crypto used to pay is itself disposed
• Liquidation: US: Taxable sale of the coins sold; UK: Your disposal if you retained ownership
• Repay and release: US: Not taxable; selling assets to repay is; UK: Same
• Shortfall written off: US: May be cancellation-of-debt income; UK: Check with an adviser

Record-keeping that makes this manageable

Whatever the answers, the adviser will need:

• The loan agreement, especially the title, use and liquidation clauses.
• The date, quantity and value of every collateral transfer in and out.
• Your acquisition dates and cost basis for the coins pledged, by lot.
• Every interest payment, with the asset used to pay it.
• The liquidation notice and sale confirmation, if any.
• What the loan proceeds were used for.

Arvexo's dashboard shows the loan events; your own records supply the basis. Export both before year end.

Questions to put to an adviser

1. Under this agreement, does beneficial ownership of the collateral stay with me?
2. Is posting the collateral a disposal in my jurisdiction?
3. If the collateral is liquidated, how is the gain computed and which lots are treated as sold?
4. Is any of the interest deductible given what I will use the loan for?
5. If I sell crypto to repay, what is the tax on that sale at today's price and at a lower price?
6. Does the HMRC April 2027 measure (UK) or any pending US guidance change the answer?

Frequently asked questions

I've read that crypto loans are "tax-free". Is that wrong?

It is incomplete. Receiving the loan is not taxed. Posting collateral is usually not taxed but depends on the contract. Liquidation and selling to repay are taxed. "Tax-free" describes one step out of five.

Does it matter that the loan is in dollars rather than stablecoins?

For receipt, no. For UK taxpayers, receiving and later paying with stablecoins would add disposals of the stablecoins themselves. A USD loan avoids that layer.

What if I live somewhere other than the US or UK?

The questions are the same; the answers differ by country. Some jurisdictions have no capital gains tax on crypto; some treat every transfer as a disposal. Ask locally.

Does Arvexo report to tax authorities?

Reporting obligations depend on the lender's jurisdiction and the customer's. Ask Arvexo directly about current reporting; this article does not describe it.

Before you borrow

Read the custody and title clauses, decide your repayment source, and take both to an adviser with the six questions above. Then use the calculator for an indicative quote, and the custody guide for the ownership questions in detail.

Related reading

• What is rehypothecation, and why it matters for your crypto collateral
• Repaying a crypto-backed loan: what to check before you borrow
• Margin calls and liquidation: what every borrower should know
• How does liquidation work?

Collateral can fall in value and be sold. This article is for general informational purposes only and does not constitute financial, investment, legal, or tax advice.

Sources

1. IRS, general guidance that loan proceeds are not income because of the obligation to repay (e.g. Publication 525).
2. IRS Notice 2024-57, section 3.05 (digital asset lending).
3. HMRC, Cryptoassets Manual, DeFi lending and staking: beneficial ownership of collateral; disposals when paying in cryptoassets.
4. HMRC / GOV.UK, cryptoasset lending and liquidity-pool measure announced 13 July 2026, effect from 6 April 2027.
5. IRS, Publication 550 (investment interest expense) and Topic 505 (interest expense).
6. IRS, Frequently asked questions on digital asset transactions: sales and exchanges as taxable events, updated 30 June 2026.
7. Arvexo, What happens if I miss a payment? (help centre).
8. IRS, Topic 431, Canceled debt.