Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How Ultra-Wealthy Families Use Crypto-Backed Lending for Liquidity
Transcript
- Lucas: Welcome back to The High Net Worth Podcast. I'm Lucas. Luna: And I'm Luna. Today we're looking at a strategy that more family offices are quietly adopting: crypto-backed lending. Lucas: Right. The idea is simple on paper — you borrow cash against your bitcoin or ether holdings instead of selling them. But the execution, the risks, and the tax implications are worth unpacking. Luna: And we have a specific case that brings it to life. A single-family office we spoke with — they manage about $800 million — took out a $20 million loan collateralized by bitcoin earlier this year. Lucas: That's a meaningful number. Let's start with the why. Why borrow instead of sell? The answer is taxes. If you sell bitcoin that has appreciated, you trigger a capital gains event. In the US, if you've held for over a year, that's the long-term capital gains rate — up to 23.8 percent including the net investment income tax. On a $20 million gain, that's nearly $5 million to the IRS. Luna: And that's assuming you're in the top bracket. So by borrowing, you defer that tax bill indefinitely. The loan proceeds are not taxable income. Lucas: Exactly. The IRS treats loan proceeds as debt, not income. So you get liquidity without a taxable event. This is the same logic behind securities-based lending — borrowing against a stock portfolio. But crypto adds a twist. Luna: The volatility. Bitcoin can move 10 percent in a day. Ether even more. So the collateral value is swinging wildly. Lucas: And lenders protect themselves with loan to value ratios — typically 50 percent for bitcoin, sometimes lower for altcoins. If the collateral drops, you get a margin call. You either add more crypto or pay down the loan. If you can't, the lender liquidates your assets. Luna: Which is exactly what happened to some borrowers in the 2022 crypto winter. We saw forced liquidations that turned paper losses into realized ones. Lucas: Right. So the family office we spoke with was very deliberate about this. They didn't go to a retail platform — they went through a private wealth desk at a major bank that now offers crypto custody and lending. The terms were customized. Luna: What kind of rate did they get? That's the key question for anyone considering this. Lucas: They locked in at SOFR plus 250 basis points — so around 7.5 percent as of early 2026. That's higher than a securities-based loan against a stock portfolio, which might be SOFR plus 100. But still cheaper than selling and paying the tax, especially if you expect the crypto to appreciate further. Luna: And they used the proceeds for what? That matters for the strategy. Lucas: They used it to fund a real estate acquisition — a commercial property in Austin. So they effectively converted the volatility of crypto into a hard asset without triggering a tax bill. The loan is interest-only for three years, so they're betting that bitcoin appreciates enough to cover the interest and then some. Luna: That's a leveraged bet, though. If bitcoin drops, they might have to sell the real estate or add more collateral. Lucas: It is. And that's the part that gives wealth managers pause. A traditional securities-based loan against a diversified stock portfolio is much less likely to trigger a margin call. With crypto, you need to stress test for a 50 percent drawdown. This family office allocated only about 5 percent of its net worth to crypto, so the loan was manageable. Luna: So the lesson is: don't over-leverage. Treat this as a tactical tool, not a core financing strategy. Lucas: Absolutely. And there's another layer here: estate planning. If you hold crypto until death, your heirs get a step-up in basis. So borrowing against it during your lifetime lets you enjoy the liquidity without ever paying capital gains tax — the tax vanishes at death. Luna: That's the same 'buy, borrow, die' strategy used with stocks. But with crypto, the IRS has been less clear about certain aspects, like whether staking rewards are taxable income when received or when sold. That adds complexity. Lucas: Right. If your crypto is staked, the lender may require it to be unstaked first, because they need control of the collateral. That creates a time lag and potential loss of staking yield. Luna: One thing I want to circle back to: the lender landscape. In 2021, you had crypto-native lenders like BlockFi and Celsius offering these loans. Then many of them went bankrupt. Now it's mostly traditional banks like Goldman Sachs and BNY Mellon that offer crypto custody and lending through their wealth desks. Lucas: That shift matters. Institutional lenders have stricter underwriting, but they also offer more stability. The family office we spoke with uses a bank that is fdic insured on the cash side, though the crypto custody is separate. They sleep better at night. Luna: And the loan documentation is more thorough. They actually had to sign a collateral management agreement that specified exactly what happens in a margin call — how many hours they have to respond, what assets can be used as additional collateral. Lucas: Let's talk about the tax reporting. The loan itself is not a taxable event. But if you use the borrowed funds to buy municipal bonds, the interest on those bonds may be tax-free. So you can create a tax-advantaged arbitrage. Luna: But the interest on the crypto loan is not deductible unless you use the proceeds for investment purposes — and even then, there are limitations under the Tax Cuts and Jobs Act. For most individuals, investment interest expense is deductible only to the extent of investment income. Lucas: That's a subtle point that many overlook. If you take a crypto loan to buy a yacht, the interest is personal — not deductible. If you take it to buy a rental property, it's deductible against rental income, but subject to passive activity loss rules. Luna: So the use of proceeds really dictates the tax outcome. This is where a good tax advisor earns their fee. Lucas: Speaking of advisors — if our conversations have helped you think about a strategy like this more clearly, or made you reconsider a decision, we want to mention something. This show is ad-free, and listener support is what keeps it that way. If today's episode was worth a coffee to you, there's a link at buy me a coffee dot com slash fexingo. It's that simple. Luna: Yeah, it's a small gesture that makes a big difference for us. We appreciate everyone who chips in. Lucas: Back to the strategy. One more angle: the international dimension. US citizens living abroad may find crypto-backed loans particularly useful because they can avoid foreign currency issues — the loan is in dollars, the collateral is global. Luna: But they also face additional reporting requirements. FBAR, FATCA — if the crypto is held on a foreign exchange, it gets complicated. Lucas: Right. So for a US person with crypto on a foreign platform, a crypto-backed loan might trigger additional scrutiny. Better to use a us based custodian. Luna: Let's talk about the future. As of June 2026, we're seeing more structured products that bundle crypto loans into notes. Some private banks are offering a 'crypto liquidity note' that essentially does this in a packaged form. Lucas: I've seen those. They typically have a fixed interest rate and a set loan to value, but they also have a maturity date. If the crypto drops below a threshold, the note can be called. That's a risk. Luna: Versus a line of credit, which is more flexible. You can draw and repay as needed. Lucas: The family office we spoke with chose a line of credit precisely for that flexibility. They can repay early without penalty. They also negotiated a right of first refusal if the bank wants to change terms. Luna: That's smart. Crypto lending is still evolving, and borrowers with significant assets have leverage to negotiate. Lucas: The key takeaway: crypto-backed lending is a legitimate tool for high-net-worth families, but it's not for everyone. You need a high risk tolerance, a clear plan for the proceeds, and a trusted counterparty. Luna: And you need to stress test your portfolio. If bitcoin drops 80 percent — which has happened before — can you still service the loan? If not, this strategy could backfire. Lucas: That's the sobering note. But for families who have already accumulated significant crypto wealth and want to put it to work without selling, a well-structured loan can be elegant. It's a way to have your crypto and spend it too. Luna: And defer the tax bill indefinitely — or even eliminate it through the step-up in basis at death. That's a powerful combination. Lucas: Next episode, we'll look at another tool in the ultra-wealthy playbook: how families are using donor-advised funds to combine charitable giving with concentrated stock positions. Until then. Luna: Thanks for listening.