How to Take Profits From Crypto Without Selling?

Cryptocurrency has become a significant asset class. Many individuals holding digital assets seek to unlock their value or generate income without selling. This allows holders to maintain long-term positions, potentially benefiting from future price appreciation, while deferring capital gains tax events. Exploring alternatives to selling enables access to liquidity or growth through various financial mechanisms within the digital asset ecosystem.

Earning Yield Through Lending

Lending cryptocurrency involves temporarily providing digital assets to a borrower in exchange for interest payments. This allows holders to generate passive income from their crypto holdings. Interest rates vary, often ranging from 1% to over 10% annually, depending on the asset, platform, and market demand.

Crypto lending occurs on Centralized Finance (CeFi) platforms and Decentralized Finance (DeFi) protocols. CeFi platforms, such as some crypto exchanges, operate similarly to traditional banks, acting as intermediaries. DeFi protocols use blockchain-based smart contracts to automate agreements, removing the need for a central authority.

Both models require borrowers to provide collateral, usually other cryptocurrency assets, often exceeding the loan value (over-collateralization). This protects lenders against defaults.

To begin, select a suitable platform based on interest rates, supported assets, and user interface. After creating an account, which may involve identity verification for CeFi platforms, deposit the desired cryptocurrency into the platform’s wallet. Lenders then choose preferred lending terms, such as fixed or flexible interest rates and loan durations. The platform makes these assets available to borrowers.

Interest accrues over time and is distributed to the lender according to the platform’s schedule, which can be daily, weekly, or monthly. Lenders monitor positions through the platform’s dashboard. Once the lending term concludes, or if flexible terms are chosen, assets and accumulated interest can be withdrawn to the user’s personal wallet.

Earning Rewards Through Staking

Staking involves locking cryptocurrency holdings to support a blockchain network, especially those using a Proof-of-Stake (PoS) consensus mechanism. This mechanism selects validators based on the amount of cryptocurrency they commit as “stake.” Staking helps secure the network by allowing staked assets to validate transactions and create new blocks.

Methods for staking include direct staking, which requires significant crypto and technical expertise (e.g., 32 ETH for Ethereum). Delegated staking allows users to assign tokens to a validator who manages technical aspects, sharing rewards proportionally. Liquid staking provides a tokenized representation of staked assets, usable in other decentralized finance applications while original assets remain staked.

Most protocols involve lock-up periods, where assets cannot be moved, and unbonding periods to unlock assets after unstaking.

To begin, select a cryptocurrency supporting PoS and choose a staking method or platform, such as an exchange or self-custody wallet. If delegating, choose a reputable validator. Transfer the cryptocurrency to the chosen service or wallet, then initiate the staking process by locking the tokens.

Staking rewards are calculated based on the amount staked and the network’s reward rate, often expressed as an annual percentage yield (APY). Rewards are distributed periodically, such as daily or weekly, and can often be compounded by restaking. Users monitor positions and rewards through the platform’s interface. To cease staking, initiate an unstaking request, which triggers the unbonding period before assets become fully accessible.

Accessing Liquidity Through Crypto-Backed Loans

Crypto-backed loans allow individuals to obtain liquidity in stablecoins or fiat currency by pledging cryptocurrency as collateral, without selling the assets. This enables access to funds while maintaining crypto ownership and benefiting from its appreciation. These are secured loans, with the borrower’s cryptocurrency serving as a guarantee.

Key terms include the Loan-to-Value (LTV) ratio, which is the loan amount to collateral value. For example, a 50% LTV means a $5,000 loan requires $10,000 in collateral. LTV ratios range from 50% to 70%, with higher ratios increasing margin call potential.

The liquidation price is where collateral value drops, exceeding the LTV ratio and triggering automatic collateral sale to repay the loan. Interest rates vary by platform, terms, and market conditions. Loans are offered by centralized providers and decentralized lending protocols.

To obtain a loan, select a lending platform based on LTV ratios, interest rates, and supported collateral. Choose the cryptocurrency for collateral and the desired loan currency, often a stablecoin or fiat. Deposit the collateral into the platform’s designated address.

The platform calculates the maximum loan amount based on the LTV ratio and disburses funds. Managing the loan involves monitoring the LTV ratio, especially in volatile markets. If collateral value decreases and LTV nears the liquidation threshold, the borrower may receive a margin call. This prompts adding more collateral or repaying part of the loan to avoid liquidation.

Loan repayment involves returning the principal plus interest, after which collateral is released. If collateral value drops below the liquidation threshold, the system sells a portion to cover the loan.

Tax Implications of Non-Sale Profit Taking

Income from cryptocurrency lending and staking is generally treated as ordinary income. Interest earned from lending is considered ordinary income when received or accrued. Staking rewards are also classified as ordinary income when received and the taxpayer gains dominion and control over them. In both cases, the fair market value in U.S. dollars at the time of receipt is subject to income tax.

Crypto-backed loans are generally not a taxable event when originated, as borrowing funds creates a liability, not income. This aligns with traditional loan taxation, where borrowed principal is not taxed. However, certain situations can trigger taxable events. If collateral for a crypto-backed loan is liquidated due to a value drop, it is treated as a taxable sale. Any gain or loss is calculated based on the difference between the collateral’s cost basis and its fair market value at liquidation.

Interest paid on crypto-backed loans may or may not be tax-deductible. If borrowed funds are used for investment, interest might be deductible as an investment interest expense, subject to limitations. If loan proceeds are for personal expenses, interest is generally not deductible. Accurate record-keeping is important for all activities, including transaction dates, amounts, and fair market value at receipt or disposition. Due to the complex nature of cryptocurrency tax laws, consulting a qualified tax professional is recommended for specific guidance.