Where We Were
The first generation of Blockchain Lending was lending in Bitcoin. For Americans, Interest earned has always been taxable and loss of principal has always been deductible when accounted for correctly and filed on the right forms.
I wrote a piece on this subject back in 2015 called The Bitcoin Investor's Guide to Taxes and it still applies today.
Blockchain Lending 2.0, lending in other cryptocurrencies, especially Ethereum or coins issued on Ethereum like Wish or LEND is just starting so a review of these rules may come in handy if you are going to lend on any of these platforms.
Where We Are
The IRS is looking under every rock to find more sources to collect more taxes and us Bitcoin investors are not immune.
Right now, the IRS is deciding whether your loaned Bitcoin or Ether is a sale of crypto that should be taxed. There are serious implications around this. Robert Wood, an attorney, wrote a piece in Forbes on whether IRS could tax loans in Bitcoin and other cryptos. His primary argument is that since Bitcoin is taxed like property (with the declaration of capital gains or losses like in real estate or stock) that the Bitcoin used in loans is not fungible (essentially interchangeable and replaceable). Bitcoin may not be fungible since property is not fungible in reality or under IRS rules.
Wood claims that the IRS has tracking software it's using and has already summoned (legally) some crypto lending platforms on especially active accounts.
What To Do
If you like lending crypto, what do you do? How do you fight a challenge from the IRS that your coin that you loaned is not really a loan but a sale?
Track Your Loans
As I said in my 2015 piece, track your purchases, sales and loans made. Take a screenshot of the loan listing. Be ready to prove to the IRS that your express purpose in this deal is to loan your crypto out with the expectation of repayment.
Note Your Dates of Repayment
Track your repayments and put together a little spreadsheet showing your loaned amount, repayment period and track each payment.
Document, Document, Document
When in doubt, document more rather than less. Less than 1000 people declared any Bitcoin related activities on their 2016 tax returns so the IRS is on to what they see as a trend of underreporting.
And when you are noting your dates and amounts, make sure you include the Bitcoin, Ether or other crypto prices on the day you lend and the day of each repayment. You will need this for Interest earned and in case you must pay capital gains or losses.