If you’re holding a meaningful crypto position, selling it to raise cash means handing a chunk of it straight to the IRS, and borrowing against it instead is the strategy real estate investors have used for decades, adapted for digital assets.
The Cost of Selling
Selling crypto triggers a taxable event. Depending on how long you’ve held the position, that gain gets taxed as a long-term capital gain, generally around 20% at the federal level, or as ordinary income if it’s a short-term holding, which can run as high as 37%, before state taxes are even added in. If you’re sitting on a position you believe still has significant upside, selling to access cash means giving up both the tax hit and any further appreciation. For someone who wants liquidity now but isn’t ready to exit the position, that’s a real cost, not a minor inconvenience.
The Alternative: Borrowing Against the Asset
Real estate investors have solved this problem for years by borrowing against appreciated property instead of selling it. You pull equity out of a building, you don’t trigger a taxable sale, and you still own the asset when it’s done appreciating. The same basic mechanic can work with crypto: borrow against your holdings, get cash without a sale, and keep your position intact.
The obvious way people try this is DeFi lending, and it comes with a real risk that real estate lending doesn’t: sudden liquidation. Put crypto into a DeFi lending protocol and a sharp market move, a 15% drop overnight isn’t unusual in crypto, can trigger automatic liquidation of your collateral with no warning and no negotiation. You wake up and the position is gone.
How an Institutional Structure Works Differently
An institutional approach to crypto-backed lending looks different in a few specific ways. The crypto moves into institutional custody rather than a smart contract, typically with quantum-resistant security standards, and you remain a signer on the account rather than handing over control outright. If you’ve set up an asset protection trust, your trustee can be added to the account so distributions can flow according to the trust’s terms. Liquidity is then provided against the holdings through a negotiated, tripartite agreement between you, the custodian, and the lender, structured specifically to avoid the sudden, automatic liquidations common in DeFi. Insurance and specific contractual protections are typically built into that structure as well, and the arrangement is set up with tax exposure in mind from the start.
The result, when it’s structured properly: you get cash without a sale, you keep the underlying crypto position, and you avoid the immediate capital gains hit that a direct sale would trigger.
What to Weigh Before You Structure This
None of this makes borrowing against crypto risk-free. You’re still taking on debt, which means interest costs and repayment obligations regardless of what the market does next. Collateral value can still decline, and depending on how a given agreement is structured, a large enough drawdown can still affect your position even outside a DeFi-style automatic liquidation. These structures also tend to involve custody fees, legal costs to set up the trust and lending agreements correctly, and minimums that put them out of reach for smaller positions, this approach tends to make sense in the roughly half-million to multi-million dollar range, not for a modest holding.
If you’re holding a large, appreciated crypto position and want liquidity without an outright sale, this is worth exploring with people who understand both digital asset custody and estate structuring. It’s not a fit for every situation, and it’s not a substitute for understanding the debt you’re taking on, but for the right holder it closes a real gap between illiquid conviction and the cash flow of everyday life.
Educational only, not tax, legal, or investment advice. Check primary sources and speak with a qualified professional before making financial decisions.
