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RE: Tax AMA - 2018 Tax Season - Ask Me Anything
Based on the description, this is what I would think (but I would need to review the terms 100% to be certain on this). Below is from the perspective of the borrower itself.
- I would say ETH-WETH is a non-taxable event if WETH is an alternative digital representation of ETH and they trade in/out 1 for 1. No property has actually been sold.
- I would say WETH-PETH-CDP is a security deposit. If the borrower would end up with more/less ETH when withdrawing - deemed loss of ETH or realized gain for free ETH . The loss would be nondeductible if the purpose of the loan is non-investment, non-business ( is personal loan collateral).
- The existence of a loan for U.S. tax purposes would depend on whether there is set maturity dates, interest payments, recourse against borrower. Let's assume this applies. For more reading check out Roth Steel Tube Company V. Comm. Sounds like a loan on the surface.
- Repaying the loan at a USD premium could be treated as deductible original issue discount on the loan for the issue price versus redemption payment difference (if the loan is personal this is not deductible). However, re-payment of the DAI loan at a discount could trigger cancellation of debt income. All other stated interest is potentially deductible (unless personal).
See disclaimer above in original post (but you already knew that!).
Thanks for the in-depth answer.
If you're curious, the Maker team goes into more detail in its whitepaper: https://makerdao.com/en/whitepaper The Maker team itself has not released any tax guidance of its own, for understandable reasons.
I will have to look into this, it is fascinating. I would argue that a margin call is a maturity date and liquidation of positions would give rise to taxable events. Margin interest in typical investing is deductible.