Decentralized Lending

Defi Crypto

Decentralized (DeFi) lending and borrowing involves using decentralized finance protocols and digital assets as an alternative to traditional methods of issuing and taking out loans. In the traditional financial system, loans are typically granted by third-party institutions based on credit assessments. DeFi lending and borrowing has seen a lot of popularity amongst cryptocurrency investors, and traders. This is likely due to the appeal to open liquidity for other activities using cryptocurrency assets already held without having to sell and a low barrier to entry (for example, no mandatory credit assessments typical with traditional centralized lending).


Users of DeFi lending platforms provide their cryptocurrency assets to the platform and receive a passive income stream in return for providing cryptocurrency assets via smart contracts that are subsequently lent to borrowers.  For users engaging in this capacity, the passive income being generated will likely be treated as ordinary income for tax purposes. This means that the income received will be assessed at the market value in Australian dollars (AUD) of the cryptocurrency at the time it is received.  

Note: The ATO typically considers income to be reportable when it is earned. However, regarding income being earned in this capacity, there is a lack of guidance from the ATO in relation to when this happens. For example, income earned via a lending platform may require the user to claim the cryptocurrency, creating an on-chain transaction in the process. This on-chain transaction will be included in your crypto wallet and recognized as income at the date it enters the wallet. Therefore, creating a disconnect in timing between when the crypto income was available to be claimed, and when it is claimed (and there is an on-chain transaction).  

To counteract this, it is prudent to ensure as little as possible time delay between when the income generated can be claimed, and when it is claimed. Due to the market volatility of crypto, it is important to note that the value when able to be claimed, and when claimed can result in a large discrepancy in market value and therefore, the amount reported as income in your tax return. 


Users of DeFi lending platforms may opt to collateralise their cryptocurrency assets to access borrowings, opening liquidity without selling their assets to conduct other activities. Due to the volatility of the cryptocurrency market, and the ease of obtaining borrowings from a lending platform, the collateralised rate of crypto is typically higher than the funds obtained (for example, 150% to 200%). This also creates a risk buffer should the market shift quickly.  

The use of DeFi lending platforms has increased in popularity due to the ease of obtaining alternative finance and being able to access liquidity in crypto holdings without triggering a capital gains event. Although there is no specific guidance on these kinds of transactions from the ATO, it is safe to assume that a similar view will be taken as to when homeowners access the equity in their homes to fund a holiday, pay off debts, purchase a new car, etc. When accessing equity in your home, the equity you receive as fiat is not a taxable event. This is due to the ownership of the underlying asset (being collateralised) fundamentally not changing. Similarly, when collateralising your crypto to access liquidity, the ownership of the asset itself does not change and therefore does not create a capital gains event.  

It is important to note, the tax implications of what you do with the borrowed funds will dictate the respective tax treatment. For example, using the borrowed funds to acquire a new personal motor vehicle, will likely have no immediate tax implications. However, if the borrowed funds were used to acquire additional crypto on a capital account, then there will likely be tax implications when the new cryptocurrency asset is eventually sold.  

Note: It is typical for DeFi lending platforms to incur high collateral percentages, and this is to encourage stability in the financial market. To this end, most platforms will include in the smart contract an automatic sale trigger if the collateral percentage drops below a threshold. In this instance, you may find one morning that your cryptocurrency assets have been sold off to clear the total borrowed funds received. There will likely be immediate tax implications upon sale, as the cryptocurrency asset has been disposed of. This would result in a capital gain if the proceeds received exceed the cost base, or a capital loss if the proceeds are less than the cost base. It is important to understand, the capital proceeds will equal the market value of the assets disposed of, rather than the amount of you receive back (if any). 

Crypto Borrowings

It is worth noting that most DeFi lending platforms lend out cryptocurrency assets, typically in the form of a stable currency coin, rather than fiat currency. There may be tax implications as you are receiving the borrowed funds in the form of a capital asset as opposed to fiat (which is typical in the traditional finance markets). On a positive note, stable coins are historically less volatile and therefore the risk of market fluctuations are relatively low, meaning there will be less exposure to high capital gains or losses, on disposal of the coins received in this manner. 

Keeping records

The ATO imposes record keeping requirements for anyone that is transacting in cryptocurrency assets. The record keeping requirements are imperative in order to accurately calculate and report your crypto taxes in your Return. We encourage you to stay on top of your cryptocurrency investing and trading activities by keeping a diary of your activity (in excel, or your application of preference). Noting your transactions, including the nature and purpose behind each (if different). Also ensure that you have on hand your centralized exchange, and wallet transaction data to pass onto your trusted crypto tax advisor at the end of the financial year (or interim). 

Essential – Preparation of your annual crypto tax reports

It is essential that your affairs are being accurately reported within your Income Tax Return. In Australia the financial year begins on 1st July and ends on 30th June of the following year. If you are engaged in cryptocurrency activities, it is more likely than not that you will need to report your affairs for tax purposes. Typically, the most time and cost-effective way of doing this is by using a reputable coin tracking software provider. The result of your completed crypto tax reports will aid the necessary tax calculations required to be reported in your Return.  

It is important that the crypto tax reports are prepared diligently by a crypto tax professional. This will ensure that your affairs are reported completely and accurately. For example, if engaging with a lending platform and collateralizing your cryptocurrencies, this may be recognized by the software as being a disposal as it leaves your wallet and therefore, creating a capital gains event incorrectly. It is important that transactions like these are carefully reviewed by a tax professional to ensure that your affairs are reported correctly, and you are not unintentionally inflating your capital gains, or profit.  


The information presented in this article is based on the current guidelines provided by the Australian Taxation Office (ATO) and relevant legislation, but please be aware that these guidelines and laws are subject to change. This article is intended for educational purposes and may not relate to your specific situation, therefore we recommend seeking the advice of a crypto tax professional. 

Navigating this space can be tricky, there may also be additional complexities to your affairs as a result, if you are using, or considering to use a DeFi lending platform or equivalent please reach out to the Fullstack Crypto Team for a complimentary, no-obligation consultation today. 

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Stuart Reynolds is the founder of Fullstack Advisory, an award-winning accounting firm for businesses leading the future. He is a 3rd generation accountant who specialises in tech & online companies.

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