Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How Wealthy Families Use Crypto-Backed Lending for Liquidity
Transcript
- Lucas: So you've got a client or maybe yourself sitting on a few million dollars worth of Bitcoin or Ethereum. The asset has appreciated massively, but selling would trigger a serious capital gains tax event. What do you do? Luna: I think a lot of people just hold and hope they never need the cash. But there is another option that's been gaining traction in the high-net-worth world: crypto-backed lending. Lucas: Exactly. And it's not just for the crypto-native crowd anymore. Family offices and wealth managers are starting to look at this as a legitimate liquidity tool. The basic structure is simple: you pledge your crypto as collateral, and a lender gives you a loan in stablecoins or fiat, typically at a loan to value ratio of fifty to sixty percent. Luna: So if you put up ten million dollars worth of Bitcoin, you could walk away with five million in cash. Lucas: Right. And because it's a loan, not a sale, you don't trigger a taxable event. That's the big appeal for wealthy families. You get liquidity without giving up your upside exposure. If Bitcoin goes up another fifty percent, you still own it. Luna: But what about the downside? I remember in 2022, when crypto prices crashed, a lot of these loans got margin-called and liquidated. People lost everything. Lucas: That's the risk. The mechanics are similar to a margin loan in a brokerage account. If the value of your collateral drops below a certain threshold, the lender issues a margin call. You either add more collateral or pay down the loan. If you can't or won't, they liquidate your crypto. Luna: And during a flash crash, liquidation can happen fast and at terrible prices. Lucas: Exactly. That's why the loan to value ratio matters so much. At fifty percent LTV, you have a much bigger buffer before liquidation compared to, say, seventy-five percent. Some platforms even offer fixed-rate loans with no margin calls, but those rates are higher. Luna: So what kind of interest rates are we talking about for a high-net-worth borrower? Lucas: It varies a lot. For a standard overcollateralized loan on a platform like Nexo or BlockFi, you might see annual percentage rates between eight and twelve percent. That's higher than a traditional securities-based loan, which could be three to four percent. But for someone sitting on a massive unrealized gain, the tax deferral can more than offset the interest cost. Luna: Let's put some numbers on that. Say you have a cost basis of two million in Bitcoin, now worth ten million. If you sell, you owe long-term capital gains tax on eight million. At twenty-three point eight percent federal rate plus state, that's roughly two million dollars in tax. Lucas: Right. So if you take a five million dollar loan at ten percent interest, that's five hundred thousand a year in interest. But you avoid paying that two million in tax today. And you can invest the loan proceeds in something with a higher return than the interest rate. It's a classic carry trade. Luna: But you have to be careful about the source of funds. The IRS has been looking at crypto loans more closely. If the loan is structured poorly, it could be recharacterized as a sale. Lucas: That's a key point. The tax treatment relies on the loan being a true loan with personal liability. If you borrow from a platform that doesn't require a credit check or doesn't have recourse, the IRS might argue it's a constructive sale. That's why wealthy families often work with private lenders or dedicated crypto lending desks at family offices, not just retail platforms. Luna: And there's also the custody question. If you're pledging crypto, you have to move it to the lender's wallet. That means you lose direct control. If the lender gets hacked or goes bankrupt, your collateral is at risk. Lucas: That's a real concern. We saw it with Celsius and BlockFi in the last cycle. Some of these platforms filed for bankruptcy, and borrowers became unsecured creditors. So due diligence on the lender is critical. Look at their audit history, their insurance coverage, whether they use qualified custody. Luna: Are there any structures that mitigate that counterparty risk for ultra-wealthy families? Lucas: Yes. Some family offices are setting up special purpose vehicles that hold the crypto in a segregated account with a qualified custodian, and the loan is documented as a traditional promissory note. The lender never takes direct custody. That adds legal and administrative costs, but for a ten million dollar loan, it's worth it. Luna: So who are the main players in this space right now, as of mid-2026? Lucas: The landscape has matured a lot. On the retail side, you have Nexo, YouHodler, and Coinbase's borrowing program. For larger loans, there are firms like Galaxy Digital, Ledn, and some private credit funds that specialize in crypto lending. The rates are negotiable for loans above one million. Luna: And what about the loan purpose? Can you use the cash for anything? Lucas: Generally yes. Some lenders restrict using the funds to buy more crypto, but for most, it's unrestricted. People use it for real estate purchases, business capital, even paying taxes. The key is that the loan proceeds are in fiat, so you can wire them to any bank account. Luna: Let's talk about the tax reporting. Do you have to report the loan anywhere? Lucas: Not on your tax return, because it's not income. But if the loan is over ten thousand dollars, the lender may have to file a Form 8300 with the IRS. And if you're using the loan to buy a house, the mortgage lender will want to know the source of funds. So there's documentation involved. Luna: Interesting. So it's not a purely anonymous strategy. It's more about tax deferral and leverage. Lucas: Exactly. And for the ultra-wealthy, it's another tool in the toolkit. If you already have a securities-based line of credit against your stock portfolio, this is like the crypto equivalent. But the volatility of the collateral makes it riskier, so you need to be more conservative with the LTV. Luna: What LTV do you typically recommend for a conservative family office? Lucas: I've seen most advisors suggest thirty to forty percent for Bitcoin, and even lower for altcoins. That gives you a comfortable buffer even in a fifty percent drawdown. Some families will go up to fifty percent if they're willing to monitor it actively and have cash on hand to meet margin calls. Luna: And if you get a margin call, how fast do you need to respond? Lucas: It depends on the lender. Some give you twenty-four to forty-eight hours. Others, especially if the loan is automated, can liquidate within minutes if the price drops below the threshold. That's another reason to negotiate terms upfront. Luna: So you're basically saying: know your lender, know your terms, and don't over-leverage. Lucas: Exactly. And for the listener who's thinking about this, I'd say start with a small test loan. Borrow against a small portion of your crypto, see how the process works, how the interest accrues, and how you feel about the risk. Then scale up if it makes sense. Luna: You know, a lot of this reminds me of the old saying: don't borrow against your house to buy stocks. But here, people are borrowing against volatile assets to buy more volatile assets, or just to spend. It takes discipline. Lucas: It does. But for a family with a diversified portfolio, taking a crypto-backed loan instead of selling can be a smart tax move. And if you're using the loan to invest in something less correlated, you're effectively creating a tax-efficient arbitrage. Luna: Speaking of smart moves, if today's conversation saved you from a costly tax mistake or helped you think about liquidity differently, that's exactly the kind of value we try to bring each episode. If it was worth a coffee to you, you can find us at buy me a coffee dot com slash fexingo. No pressure, just a way for listeners who find this useful to keep the show ad-free. Lucas: And those contributions genuinely help us keep digging into niche strategies like this. So thank you to anyone who does. But back to crypto lending — one emerging trend I'm watching is the use of wrapped Bitcoin on Ethereum to access decentralized lending protocols like Aave or MakerDAO. That gives borrowers more control and transparency. Luna: But then you're also taking on smart contract risk. If there's a bug in the protocol, your collateral could be at risk. Lucas: Right. So there's a trade-off. Centralized lenders have counterparty risk, decentralized ones have code risk. For most high-net-worth families, a regulated centralized lender with a good track record is probably the safer bet right now. Luna: What about using a loan to pay off a higher-interest debt? Say someone has a margin loan at six percent on their stock portfolio. Could they use a crypto-backed loan at eight percent to pay it off? That doesn't seem beneficial. Lucas: Not if the rates are higher. But if they need to raise cash and don't want to sell stocks either, the crypto loan might be an alternative. More commonly, people use crypto loans for short-term liquidity needs — like funding a business acquisition or a real estate down payment — where the loan term is six to twelve months. Luna: And then they repay it once they get other liquidity, like from a bonus or a business sale. Lucas: Exactly. Or they might refinance into a lower-rate loan later. The key is to have an exit plan. Don't take a crypto-backed loan without knowing how you'll repay it. Luna: Alright, so to wrap up: crypto-backed lending can be a powerful tool for tax-efficient liquidity, but it's not for everyone. Do your homework on the lender, keep your LTV conservative, and have a repayment plan. Lucas: And if you're an advisor, this is a conversation you should be having with clients who have meaningful crypto holdings. The old default of 'just hold' might be leaving liquidity on the table.