Yield Opportunities For Those Subject to U.S. Tax Law

Yield Farming Inception
#1

Assuming some multi-year held Bitcoin (or ETH) with capital gains, what resources or strategies might somone consider to earn yield on those holdings without selling and being required to pay taxes on those capital gains? Please assume United States law and that not reporting and paying is not an option.

One could take BTC and put it in a BTC Curve pool and then take those tokens and put them in the Yearn BTC vault. But it is my understanding that even converting BTC to wBTC, renBTC, or sBTC, for example, would constitute a sale and require payment of taxes on the capital gains. Even if that was not a sale, the IRS would likely consider depositing that token for a Curve pool token to be a sale. And it would likely be another sale to get into the Yearn BTC vault. If and when Curve and Yearn create ETH pools/products, there would be similar issues with using ETH with embedded gains.

I know defi has been concerned about tokenizing everything, but if there is an option, there could be a big market for earning yield without “selling” for a token. I am not suggesting that the yield would avoid taxes or that the capital gains would never be subject to taxes.

There must be people on this forum who have considered the tax consequences of using BTC or ETH aquired several years ago.

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yETH <=> ETH Delegated Vault
#2

It is complex. But need to note that you effectively don’t owe any tax (or negligible) when converting from BTC to renBTC or similar because they have roughly the same price (the difference is taxable income). Similarly, for stablecoin conversion, essentially little or no tax is due.

#3

Assume BTC is currently $11,000 but it was purchsed several years ago at $1,000. I believe there would be tax owed on capital gain of $10,000 if sold/converted to RenBTC or wBTC. There are likely many BTC holders with capital gains that would like to earn yield on their BTC holdings but do not want to pay capital gains tax on those gains. A solution would be huge for these long-time holders.

Edit: if, however, I loan you my appreciated asset and you pay me back my asset plus interest, I believe I would only owe taxes on the interest. There must be an option that does not require trading for a token (as that would likely be considered a sale for tax purposes). Maybe doing this with appreciated ETH is easier than with BTC, which is on a different chain.

#4

crypto assets and all these things are new so there’s a lot of interpretation.

for myself, i do not look at converting btc to wbtc/renbtc/sbtc as a taxable event and i do not look at depositing that into curve as a taxable event.

that is how im gonna play my taxes.

i will however look at my yield as taxable income.

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#5

Agreed that there is a lot of interpretation, and your approach may ultimately be acceptable to the IRS. There is probobly more room for finding no sale when converting between ETH/WETH than between BTC/wBTC given the change in blockchain with the latter. For me, however, I am going to be conservative and without additional guidance will treat both as sales. A run-in with the IRS could jeopardize my career in ways others may not have to consider.

Given that, and given there are others in a similar position (or where the value at issue would attract IRS scrutiny), it would be great to develop a tax friendly option for earning yield on appreciated ETH and BTC. It seems there is a large untapped market.

#6

So I definitely can see your issues and worry about triggering taxable events.

Realistically, I think your best option is to use the base asset as collateral of some type to take a loan. There are several good options in DeFi, and if you wanted to do this against a non-ETH based asset then CeFi options like Celsius would probably be your best bet. There, you can take an overcollateralized stablecoin loan against whatever asset you want to use (for instance, ETH on Aave or BTC on Celsius), then just simply zap in your USDC or DAI or whatever stablecoin you took the loan in into the vault you’re interested in using. Keep your holdings in the vault, and then when you zap them back out there’s your completed taxable event (zap in/out). I also don’t think the zap process itself (stable->ETH->ywhatever) would generate a real taxable event, as the cost basis would be the same since the swaps happen in the same block– so again, it would only be after you zapped back out that the capital gains would be realized.

It’s not perfect, but I think that might be your best bet for now.

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#7

I appreciate the suggestions and will take a look. I thought I read that depositing ETH on Aave would transfer ETH for aETH, and if so may be deemed a sale. I’ll have to investigate.

I would prefer to stick with DeFi, but if Celsius is an option that works, then it may be worth a try.

I would love to see a DeFi way to do this, particularly one that does all the work on the backend – like manage collateralization ratios.

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#8

Hmm yeah I wasn’t thinking about the aETH transfer (if you bought ETH at a much lower price point)– in that case, Celsius would likely be your best option for ETH as well. I know we all love DeFi around here, but I’ve got extensive experience with Celsius as well and I think they’re as good as you can get in the CeFi world– if you’ve got questions, feel free to reach out.

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#9

this discussion is also why i am excited for the yETH vault.

can just deposit my appreciated eth without taking any capital gains.

i will then simply treat any yield on that ETH as income.

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#10

Taxes?! Where we are going, we don’t need taxes!

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#11

Per toxentax (replace aETH with yETH and I think it’s the same)

  1. You buy 1 ETH at $200. Later, when 1 ETH is $350, you use that 1 ETH to mint 1 aETH. You realize a capital gain of $150 here and will owe tax according to your capital gains tax rates.
  2. Over the next month, you lend via your aETH, earning an equivalent of $10 in aETH. You owe tax on this $10 of income per your income tax rates.
  3. ETH drops to $300, and you decide to convert your aETH back to ETH. Because the price of your aETH is matched to the price of ETH, you’d recognize a capital loss here. However, this capital loss would only subtract from any capital gains you have, not from the income you recognized on the aTokens received for lending.
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