Selling an appreciated crypto asset locks in a capital gain and a tax bill. Borrowing against it does neither. That difference is why holders with significant, appreciated positions increasingly borrow instead of sell when they need cash, keeping the underlying asset and its upside intact.
Part of our guide: Crypto Taxes.
Why borrowing sidesteps the tax hit
Selling triggers a taxable event, full stop. If your portfolio is meaningfully up from your cost basis, that sale creates a capital gains bill regardless of what you plan to do with the proceeds. Borrowing against the same asset doesn’t. You get access to the cash, you keep the position, and there’s no sale to report to the IRS.
Loan-to-value ratios and why lower isn’t all bad
Traditional assets can often be borrowed against up to roughly 90% of their value. Crypto sits much lower, typically in the 40-60% range, which sounds like a disadvantage until you consider why: crypto’s volatility means lenders build in a bigger cushion. That lower LTV actually adds a measure of stability if the market pulls back, since you’re carrying less leverage relative to the asset’s value than you would with a traditional loan.
DeFi liquidation risk versus private lending terms
This is the part that trips people up. On most DeFi lending protocols, once your collateral value drops past a set threshold, liquidation happens automatically and immediately, with no warning and no time to respond. Private lending arrangements generally work differently: many give borrowers several days to respond to a margin call, sometimes with the option to top up collateral or buy the position back, rather than an instant, code-enforced liquidation. That structural difference matters a lot if you’re borrowing through a volatile market cycle, and it’s worth confirming explicitly in the terms before you borrow, not after a price drop.
A conservative approach to think through
One structure some holders use is borrowing at a modest loan-to-value, for example 50%, and directing that capital toward something generating steady yield, letting the income service the loan while the underlying crypto position keeps compounding untouched. This isn’t a guaranteed outcome or a risk-free strategy, yield-generating investments carry their own risk, and a large enough price drop can still put you in a difficult position even at a conservative LTV. The people who use this approach successfully tend to avoid selling appreciating assets at all, instead borrowing, reinvesting, and repeating, with borrowing generally more attractive in down markets than right after a sharp run-up, when liquidation risk from a subsequent pullback is highest.
Whatever LTV you choose, read your lender’s terms carefully before borrowing, since liquidation policies vary significantly between platforms and can change the entire risk profile of the strategy.
Educational only, not tax, legal, or investment advice. Check primary sources and speak with a qualified professional before making financial decisions.
