Tax Strategy · September 15, 2026 · 10 min read · By CryptoTaxCalc Team

Crypto Lending and Borrowing Tax: The 7-Country Interest Guide

Lending USDC on Aave, borrowing against your BTC, or earning yield on Nexo — each of these is a different tax event in every country. The US taxes interest as ordinary income, Germany may treat the deposit as a disposal, and the PARITY Act §1058 reform could change everything. Here's the map.

Image: Illustrative purposes. Tax rules cited from IRS Notice 2014-21, Revenue Ruling 2023-14, IRS proposed regulations on DeFi broker reporting, HMRC Cryptoassets Manual, BMF letter of 10 May 2022, CRA Folio S5-F3-C1, ATO guidance, NTA guidance, and Indian Income Tax Act §115BBH.

A reader emailed last month asking whether the USDC interest she'd earned on Aave over two years was taxable. She'd assumed — reasonably — that because the principal came back whole and USDC "doesn't move," there was nothing to report. The honest answer is that in every one of the seven countries on this site, every dollar of USDC interest is taxable income on the day it hits her wallet, valued at fair market value that day. Two years of accrual was not a small number.

That's the lending side. The borrowing side is messier — and thanks to the 2022-2023 platform collapses (Celsius, BlockFi, Voyager, FTX) and the 2024 IRS guidance on DeFi broker reporting, it's now the area of crypto tax with the most unresolved questions. Below I'll walk through how seven countries treat lending interest, lending deposits, borrowing, and collateral liquidation, and where the PARITY Act reform may change the picture.

1. The US: ordinary income, taxable disposal on deposit (proposed), and the bankruptcy ruling

Three layers of US tax apply to crypto lending:

Layer one — interest as ordinary income. Interest you receive from lending crypto, whether on Aave, Compound, Nexo, or a private counterparty, is ordinary income at the fair market value of the interest on the day it is credited to your account. This goes on Schedule 1 (Form 1040) as "other income" or Schedule B as interest income depending on the structure. The cost basis of the interest received is its fair value on the day of receipt, so when you later sell that interest token, you have a second taxable event on any gain.

Layer two — the deposit itself may be a taxable disposal. The IRS's proposed DeFi broker regulations (issued in 2024, effective for 2026 reporting) hint that when you deposit USDC into Aave and receive aUSDC in return, you may have exchanged one property for another — which is a taxable disposal of the USDC and a new acquisition of aUSDC at fair value. Most of the time the values are nearly identical, so the gain is near zero. But the IRS has not issued final guidance, and tax practitioners are split. The conservative approach treats each deposit as a taxable event; the aggressive approach treats the deposit/withdrawal pair as a non-taxable wrapper.

Layer three — the bankruptcy loss ruling. Revenue Ruling 2023-14 settled a long-running question: if you lost crypto on Celsius or BlockFi, the loss is a non-business bad debt, deductible as a short-term capital loss on Form 8949 in the year the loss becomes "worthless" — typically the bankruptcy proceeding's determination year, not the year of the collapse. The deductible amount is your cost basis, not the value at the time of the collapse. For a Celsius user who deposited 1 BTC at $60,000 and received nothing back, the loss is $60,000 (their basis), deductible against ordinary income up to $3,000/year with carryforward.

2. The 7-country map: lender side

Three things stand out:

The US is the most aggressive on the deposit-as-disposal question. The proposed regulations have not been finalised, but the IRS's direction of travel is clear: if you receive a receipt token (aUSDC, cUSDC) representing a position in a DeFi pool, that receipt token is a new asset, and acquiring it by giving up your original USDC is a disposal. The tax community is divided on whether to file conservatively now or wait for final guidance.

India's VDA regime treats lending as a disposal. Because every transfer of a virtual digital asset is taxable under §115BBH, lending crypto to a protocol is a taxable event — both the deposit (taxable at 30% on any gain) and the eventual return-of-principal (also taxable, though often near-zero if values are stable). The 1% TDS also applies to each transfer. This makes DeFi lending in India a tax-heavy activity.

The UK's HMRC is unusually clear and lenient. HMRC's Cryptoassets Manual treats most lending deposits as non-taxable on the way in; only the interest received is taxed, and the principal's return is non-taxable (it was never "disposed" of in HMRC's view). This is one of the few areas where UK tax treatment is genuinely more favourable than US treatment. The DeFi-specific guidance on the broader DeFi tax guide walks through the HMRC position in detail.

3. The borrower side: collateral, loans, and the liquidation trap

The borrower side is more uniform across countries, but has one trap that catches almost everyone in a market crash.

Borrowing is not taxable. When you deposit BTC as collateral on MakerDAO, Aave, or a centralised lender and borrow USDC or fiat against it, the loan principal is not income. It's a loan. No tax is due on drawdown. When you repay the loan and reclaim your collateral, that's also not a taxable event (assuming the platform doesn't change your collateral's nature). This is the same in all seven countries covered here.

Interest paid on the loan is generally not deductible unless the loan proceeds are used for an investment or business purpose (US IRC §163; UK similar). Using borrowed USDC to buy more BTC for investment makes the interest deductible as investment interest expense (subject to US §163(d) limits). Using it to pay personal expenses does not.

The liquidation trap is the big one. If the protocol or lender liquidates your BTC collateral because the loan fell below the LTV ratio, the forced sale of your BTC is a taxable disposal at the liquidation price. This catches borrowers in a market crash in three ways:

• You realise a capital gain or loss on the collateral at the liquidation price (which, in a crash, is often a loss). In the US this is reportable on Form 8949; in the UK on the CGT return; in Germany only relevant if within the 1-year speculative period.
• You may have a taxable forgiveness-of-debt event if the liquidated collateral doesn't cover the loan amount (rare in crypto because of over-collateralisation, but happens in volatile crashes).
• You have lost the asset you were holding for long-term capital-gains treatment — meaning a forced sale can convert what would have been a long-term gain into a short-term gain if the liquidation happens within 12 months of acquisition.

This last point is why I tell anyone borrowing against crypto to track their cost basis carefully. A forced liquidation that converts a long-term gain into a short-term gain can double the tax rate on the same profit.

4. The PARITY Act §1058 reform: what could change

The PARITY Act, introduced in the 119th Congress, proposes to extend IRC §1058 (the stock-lending provision that lets securities be lent without triggering a taxable disposal) to qualifying crypto-assets. If passed, the act would:

• Make crypto lending deposits non-taxable on the way in (resolving the US proposed-regulations ambiguity)
• Treat receipt tokens (aUSDC, cUSDC) as not-acquired for tax purposes during the lending period
• Exempt collateral-for-loan arrangements from taxable-disposal treatment
• Still tax the interest received as ordinary income (the income layer doesn't change)

As of September 2026, the PARITY Act has not been enacted. Industry groups (the Blockchain Association, the Chamber of Digital Commerce) are pushing for inclusion in a year-end tax bill, but the congressional calendar is crowded. Until it passes, file under the current property-and-disposal rules.

The PARITY Act would put US treatment closer to UK treatment — where lending deposits are already non-taxable on the way in. It would not, however, change the treatment of interest received, the treatment of liquidations, or the bankruptcy-loss rules.

5. Practical record-keeping for lenders and borrowers

Three habits that will save you a lot of pain:

• For each lending deposit, record: date, amount, asset, USD value at deposit, and what receipt token you got. If the IRS finalises the disposal-on-deposit rule, you'll need this to file each deposit as a disposal. Even under current rules, it's the only way to reconstruct the basis if the protocol changes or your position is liquidated.
• For each interest payment received, record: date, amount, asset, USD value at receipt. This is income. The USD value at receipt becomes the cost basis of the interest token, so when you eventually sell it you'll need both numbers.
• For each loan, record: collateral type, collateral amount, collateral basis, loan amount, drawdown date, repayment date, interest paid. If your collateral is liquidated, you'll need the basis of the liquidated collateral to compute the gain or loss.

The calculator on this site handles single interest-income events and single disposal events — type in the date, amount and price, and it gives you the gain or loss in your country. For full DeFi activity logs across many protocols, the CSV batch import handles the volume. Run the numbers before April.

Bottom line

Crypto lending and borrowing sit in the messiest corner of crypto tax — three layers of income, a proposed disposal-on-deposit rule in the US, a flat 30% treatment in India, and a PARITY Act reform that may simplify half of it but won't touch the rest. The interest you receive is income in every country. The deposit may or may not be a disposal depending on where you file. The loan you take is not income. The liquidation of your collateral is a taxable event you don't want to forget. Track every deposit, every interest payment, every loan — because the protocol's record is the IRS's record, and the protocol's record survives even if the protocol doesn't.

General information, not tax advice. DeFi lending tax treatment is genuinely unsettled in several countries — IRS proposed regulations are not final, and HMRC is consulting. For material lending or borrowing positions, work with a tax professional who follows the latest guidance in your filing country.

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