Crypto Lending & Borrowing: Collateral, Yield Sources and Liquidation Risk

Crypto lending has two sides: borrowing against collateral and lending assets to a borrower, platform or protocol in exchange for interest/rewards. Both can involve credit, liquidation, smart-contract and liquidity risk.

Borrowing: not selling does not automatically mean no tax event\nSome users borrow because they do not want to sell holdings, but tax treatment depends on local law and the transaction structure. Transfer of collateral ownership, wrappers, interest, rewards and liquidation can all affect the result. Do not treat “collateralized borrowing is usually tax-free” as a cross-jurisdiction rule; check the local tax authority or a qualified professional.

Core borrowing risk: liquidation\nIf collateral value falls or debt rises past a product threshold, the platform/protocol may force-sell part or all of the collateral. Thresholds, penalties, oracle design, rates and margin rules vary by product.

There is no universal safe LTV\nBorrowing a smaller fraction generally creates more price distance, but no fixed LTV is a safety guarantee. Stress-test actual volatility, liquidation thresholds, rate changes and tail moves.

Lending: who pays the yield and why\nYield can come from borrower interest, protocol incentives, market making or other arrangements. A higher APY is not automatically better; identify the source, lockup/redemption terms, counterparties and asset risks.

CeFi and DeFi fail differently\nCentralized products add platform/custody/solvency risk; on-chain protocols add smart-contract, oracle, governance and wallet-operation risk. Both can face liquidity stress.

Tax boundary\nOur tax scenario calculator only calculates assumptions you enter. It does not decide whether borrowing, interest, rewards or liquidation is taxable. Use the local tax authority and qualified advice for that determination.