The Guide to Tracking Bitcoin p2p loans for US citizens

In US Dollar based p2p lending, our primary concern is tracking Interest Earned. We track this through ROI or IRR or one of the other generally accepted methods for calculating Interest. We also track gains or losses on the sale of a loan if we sell our portion of a loan on the secondary market known as FolioFn and track loss of principal in the event of a default on one of our loans. This sounds like alot to track but it really isn't. Interest is relatively easy to track, most lenders are not active in the secondary market (myself included I never use it) and loss of principal is easily determined on our monthly statements from Prosper and Lending Club so that we can note this loss on our tax returns.

Lend in Bitcoin (BTC) and its a little bit of a different story. As I mentioned on my post on BTC's tax treatment, every deal with Bitcoin is 2 transactions: 1) Noting Revenue generated in USD through converting the BTC back (even if you hold onto it) and 2) Capital gain or loss on the sale of BTC back into USD.  This is for US law, in your country your mileage will definitely vary.  This applies when selling a product or service for BTC as payment.

How does this apply to BTC lenders?

On our original investment in loans where we have converted our home currency into BTC, we have to track our purchase price of BTC cause remember, if we EVER sell it we will need to note the capital gain or loss. With services like Coinbase, its very easy to get your purchase price everytime you convert to BTC and including all fees involved in the transaction. If you have not been tracking this, it's better late than never, go get your purchase price records for your BTC that you have purchased.  That's #1

Next, just like our USD lending peers, we have to track our Interest Earned cause in the US and in most other countries Interest is taxable. Here we are no different and we can use ROI or IRR or something else, just that we are tracking in in BTC.

What happens with mined BTC or Reinvested BTC?

For those of you that mine your own BTC, guess what your cost basis for calculating capital gain/loss is?  If you said ZERO, then congrats. You're right. Electricity, equipment and pool fees are irrelevant. Your cost basis is Zero and any price you sell it for now, including today's current price of $385-ish means you will have a $385-ish capital gain upon your sale of that coin.

If you don't mine your own coins but you reinvest your earned interest in BTC, guess what? The same rules apply to you.

A Practical Example

For example, I lend out 3 BTC and over the course of 3 months, I now have 4 BTC.  If I sold them all to convert back into USD, what would I owe?  I'm going to keep it simple and say that I bought my 3 BTC all at once for $400 and today's price is $385.

My Cost Basis (how much I paid to buy my BTC):  $400x3=$1200

My Sale Basis (amount I sold my BTC for in the market): $385x4=$1540

Is my capital gain or loss short term or long term?  Long term is more than 1 year and since I said this is over 3 months so then I have a short term capital gain of  1540-1200 or $340.

Note that even with the price of Bitcoin dropping slightly, I still have a capital gain. Why? Because the cost basis of my 4th coin, the one that came from my Interest generated is Zero.

Let's use the same example but I DON'T sell. What do I owe?

I have not sold so I have no capital gain or loss to report but my 3 BTC are now 4 BTC so I have to report that 1 BTC as Interest Earned. I have to calculate its worth in USD and report that as Interest earned on my tax returns.  This interest earned applies whether I sell my BTC or not, so in other words, my first example is a $340 capital gain AND $385 worth of Interest Earned. Double Whammy

If you lend in BTC to other people and businesses, you have quite a few things that you need to track including cost basis, sale basis, Interest earned, conversion rates to USD and overall profitability of your lending strategies. You should not let this stop you from dipping your toes in the Bitcoin lending waters though. I am able to track all this on a set of Excel spreadsheets and you probably can too.



About the author

Stu Stu Lustman, the author of this post, is a Credit Analyst by trade trying to bring Commercial Credit Analysis techniques to the world of Peer to Peer Lending. Check me out on Twitter, LinkedIn and Google+

2 thoughts on “The Guide to Tracking Bitcoin p2p loans for US citizens”

  1. Stu, thanks for sharing your experiences and advice on p2p lending. After reading your post about BTC lending I jumped in and tried it too. How are you going about tracking it for tax purposes exactly? The information that BTCJam gives me makes it very difficult to track. If I lend straight BTC for BTC I need to track the price of BTC on each repayment. So if a loan is paid back in 26 installments I need to know the price of BTC on the day I receive each of those payments. If I lend BTC tied to Bitstamp it is a little easier, but I need to figure out the price of BTC at the time the loan was activated. Is this the same way you understand it needs to be done?

    • Clay, excellent question.

      The letter of the law would require tracking each payment but what I do is track Interest Earned over a period of time (month or quarter) and then convert at the end of that period back into USD. For instance, here on my blog, I convert back for portfolio purposes and not through actual sales to report on my BTC loans in USD along with my Prosper and LC loans.

      When it is straight BTC for BTC, your BTC earned is your Interest so you could do a month end BTC price for conversion purposes or just take the sum total of your 26 payments received like in my example where my 3 BTC becomes 4 BTC due to Interest. Bitstamped can be easier but also might be more complex since you have to track USD Interest earned and BTC Interest earned. It’s complex either way and it seems like you understand it correctly to me.


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