Defi and Taxes – Borrowing
Deposit of collateral does not represent a taxable event, as the economic ownership of the collateral remains with the borrower at all times. However, if it involves an exchange of the token (e.g. cTokens in Compound), it will be treated as a sale and will be taxable.
The payout of the loan as well as the repayment of the principal are not taxable, provided the repayment is the same amount in value and denomination.
However, if the loan gets liquidated, then it will be treated as a sale and needs to be reported as a capital gain/loss.
It depends on the purpose of the loan if you can deduct the interest payments. In the case of a loan taken for commercial purposes by a business, it can be deducted as a business expense.
For detailed information on tax reporting of borrowing, please check our full article DeFi Taxes – Lending and Borrowing.