So yeah, if you got your coins back in 2009-2010, you might pay more to sell them than to use them as collateral for a loan. However, you probably also have a massive stack of coins.
You only pay capital gains on the difference between the USD denominated value at the time you obtained your Bitcoin and the value at the time you sold it. Moreover, your cap gains rate will vary based on a couple major factors: First, your annual income. If you are in the highest tax bracket, you’ll have a higher cap gains rate as well, while you may have no cap gains at all if you are in the lowest tax bracket. Second, whether you have held the asset for one year or less, or for more than a year. The highest rates (10%-37%) are restricted to assets sold that you held for one year or less. Anything you held longer than that tops out at 20% and could be as low as 0%, depending on your annual income. So, it just might be that you pay LESS for selling than in interest on a loan.
A comparison might be in order. Let’s compare getting a $100k loan from Strike vs a couple different scenarios of selling to obtain the same amount of fiat and compare the total cost. Remember, the total cost of the loan isn't just the interest. The principal has to be paid back at some point, as well.
Conveniently, Bitcoin has “crashed” back to around $100k, so that will help us make the math easier by assuming a $100k value for Bitcoin for these examples.
Strike Loan: Getting a loan for $100k requires the borrower to post 2 full Bitcoin as collateral. Let’s assume our borrower is being responsible and his stack is at least 5x that, for a total stack of 10 Bitcoin. That means only 20% of his stack is at risk, should the price plummet, so he has plenty to post as additional collateral, if needed. Strike’s loan terms right now are for a max of 12 months, and the rate for a loan that “small” is currently quoted at 13% on their website. Assuming the borrower needs to use that money for something, he takes the option to make interest only payments until maturity, at which time he pays back the principal as well. So, he started with $0 fiat and 10 Bitcoin, posting 2 as collateral to receive $100,000 in fiat. Over the course of the loan, he makes monthly payments of about $1,083.33 and pays back the $100,000 principal at the time of maturity. His net fiat cost, then, is $13,000 in interest, but his total cost to borrow is $113k. However, he also gets the full 2 Bitcoin back that he put up for collateral, so he still has 10 Bitcoin. Total cost fiat = $113k and total cost Bitcoin = 0.
High-Income Seller: Now let’s assume this same individual is high-income (married and making $584k a year) and he decides to sell enough to get the same $100k; namely just one Bitcoin, while he keeps the other 9 in cold storage. Assume he bought his coins at $15k back between 2017 and 2020, so when he sells one Bitcoin, he is going to pay 20% cap gains (highest tax bracket for long-term) on the difference between $15k and $100k, for a total of $17,000. However, he also doesn’t have to pay $100k principal + $13,000 interest back to a lender, so he can use that money that would have had to come out of his income to pay off the loan, less the amount he had to pay in taxes, to DCA $96,000 of fiat over 12 months back into Bitcoin. Depending on what the price does, he may end up with more Bitcoin in the end than he started with, or he may end up with less. For the sake of making things obvious, he spent the exact same amount in fiat terms as the one who borrowed. $96,000 DCA + $17,000 in cap gains is a total of $113k, and a net cost of $13,000, just like if he had gotten a loan from Strike. But the Bitcoin side of the equation is a big question mark, because he may have ended up with MORE than 10 Bitcoin in the end, or more like 9.5-9.9 Bitcoin, depending on what the price did in that 12 months he was DCAing back in. It’s impossible to say whether borrowing or selling was the better choice for him until after the 12 months is up and he sees how much he was able to purchase for that $96,000. Total fiat cost = $113k, total Bitcoin cost 0 to 0.5, and may have actually come out ahead.
Low-Income Seller: Finally, let’s assume that this same individual is low-income instead (married and the household makes about $90k a year), and he sells the same 1 Bitcoin out of his stack of 10 that he bought back between 2017 and 2020. Well, that means his cap gains rate is 0%. There are no long-term cap gains for married folks with an annual income of less than $94,050 combined. So it costs him nothing, except the 1 Bitcoin he sold to get the $100k in fiat. However, his income is not going to allow him to DCA NEARLY as hard as if he had a high income, right? He can’t even put $96k back in over 12 months. That would be more than he makes a year, and his family needs to live off that. So maybe he sold one of his Bitcoin in order to put a nice down payment on a home and keep the monthly mortgage payments as small as he could, allowing him to at least DCA $1,000 a month back into Bitcoin. So, while he has no net cost on the fiat side, he is only able to stack maybe 10m-15m sats over that 12 months, depending on what the price does, leaving them with a final of 9.01 Bitcoin. Total fiat cost = $12k, total Bitcoin cost = 0.9.
That said, in the last example, a loan from Strike would not have left our fictitious low-income seller in a better position by borrowing instead. He would barely have had enough income to make the $1,083.33 a month in interest-only payments, and then he still would have had $100,000 in principal he needed to come up with to get his 2 Bitcoin back, with nowhere for that to come from. His only choices would have been to roll the loan over for another year and pay another $13k in interest, or sell whatever amount of Bitcoin was needed to pay off the loan. If Bitcoin went up significantly during that time, it would probably be a considerable amount less he needed to sell than if he had not borrowed, but he would still end up with a total stack of 9.[?] instead of the full 10.
In short, the real answer as to whether it is better to borrow against your Bitcoin or just sell it and buy back in over time is not a matter of cap gains costs vs interest costs. Rather, it depends on whether Bitcoin goes up or down in USD denominated value during the period of time in question. If you sell and Bitcoin goes up, then borrowing probably would have better served you. If you borrow and Bitcoin goes down, then selling probably would have better served you.
Indeed, even jack mallers (npub1cn4…3vle) has said that we should not be afraid to pay cap gains in the right circumstances. See his remarks on Strike’s bill-pay service, which is in reference to the higher rate, short-term cap gains.
what do you mean? you have like 10-12 cap gains events a year and you just pay the taxes
also, think about it, if you have a capital gain that means you avoided asset price inflation. that means you gained against a fiat that is being debased
not wanting to deal with a capital gain is wanting to be poor
So, it’s not nearly as cut and dried as you have made it seem.
At certain times and for certain people, who are responsible about the percentage of their stack they are putting at risk, Strike’s loan product is a nice option to have. However, for other folks, and at other times, it may just be better to sell and DCA back in.
So, I think that the “never borrow against your Bitcoin” crowd are wrong, but I also think the “never sell your Bitcoin” crowd are equally wrong. And I guess that probably leaves me with no friends. 😂
Disclaimer: I am not a tax advisor or tax professional of any kind. Nothing said above should be construed as tax advice.