Crypto Credit Lines vs Selling: Which Saves More Money?

When your crypto investments grow in value, and you wish to obtain capital, the most common option is to sell the asset for fiat or stablecoin. Unfortunately, the total cost of selling the asset is expanded by capital gain taxes, exchange fees, and bank charges when converting to fiat. In regions with an operational crypto tax law, capital gain taxes are anywhere between 10% and 35%, depending on how long you held on to your investment. These factors push the cost of selling your asset to over 15% on average.

This situation creates a dilemma, especially when a second option exists. The second option is opening a credit line against your investment. Credit lines allow you to borrow repeatedly against your collateral. As it is a loan structure, Credit lines are tax-free. Therefore, you avoid paying taxes. Credit line platform, Clapp Finance also offers an IBAN account and is integrated with SEPA instant to process fiat conversions at a fraction of the usual fee. This enables you to save on bank charges, which also contributes to the total cost of directly selling your asset.

With this option in place, investors are split between credit lines and direct sales in terms of cost efficiency.

Let’s consider the different scenarios and which one saves more money.

Investors living in a zero or low crypto tax region

Individual investors in the UAE, Singapore, and El Salvador enjoy zero tax on their crypto investment gains. Several other countries also offer zero taxes or rates lower than 10%. For investors living in such regions, the efficiency line between credit lines and selling is thin, especially if they do not wish to maintain a low LTV ratio. In this case, you may save more money by simply selling your asset.

Investors in high tax regions

The maximum crypto tax rates are 55% in Japan, 45% in Germany, and 37% in the United States. This rate is significantly higher than the average rate on a crypto lending platform. For instance, the maximum interest rate on Clapp Finance is 21%. Therefore, opening a crypto credit line instead of selling may save you more money. However, we recommend that you consult a tax expert, as countries with high tax rates usually have strict tax laws. Be sure to gain clarity on regional and conditional variations in tax rate.

When holding a highly appreciated asset

When your investments appreciate well, you are likely to have tangible profits; paying taxes may mean losing a significant amount. In this case, any percentage saved by borrowing against the asset represents tangible value. We therefore recommend a careful consideration of the options. If your assets have appreciated significantly, you can afford to maintain a low LTV by borrowing only a portion of the approved amount. This gives an edge in pursuing low-interest-rate loans and saving more money. However, note that crypto assets that have appreciated rapidly and significantly are vulnerable to sharp retracements. Maintaining a low LTV ratio is essential here.

Investors holding a volatile asset

If the asset you are holding is volatile, you may consider a direct sale to secure your profits. While opening a credit line may help you avoid paying high taxes, the asset value may decrease significantly during the borrowing period. This will reduce your profitability and may lead to liquidation. Also, keep in mind that liquidations count as a disposal, and you may be required to pay taxes on the liquidated amount.

Investors with unpredictable future liabilities.

Credit lines are perfect for this scenario and save you more money than selling. If your asset is relatively stable and you wish to raise capital, a line of credit helps you maintain a reserve for emergencies without selling your asset or paying taxes. Clapp Finance only charges interest on used collateral; you are not required to pay interest if you didn’t withdraw from your credit line. On the other hand, when you sell your assets without having a defined expense, you may end up using none or a portion of the capital while paying tax on the full amount.

Investors who wish to maintain exposure to the crypto market

If you wish to access capital from your investments while maintaining exposure to the market, credit lines are more effective. They save you more money than selling and buying back later. Credit lines are also more efficient since you can borrow from your credit line to purchase more of your collateral assets. This way, you fund your DCA strategy creatively. Credit lines open many opportunities for investors who wish to maintain exposure to the market.

Conclusion: Should you sell your asset or open a credit line

Credit lines offer flexibility and a steady flow of capital. On platforms like Clapp Finance, you can even access zero-interest loans. However, like loans in general, it does not come without its own caveats. The riskiest parts of crypto credit lines are liquidation and varying interest rates. If you can manage these factors and maintain an LTV ratio that allows you to pay minimal interest, then credit lines are relatively more cost-efficient than selling your investment. Either way, this is invalidated if you are in a low tax region. Other factors, such as sustained exposure to the crypto market and access to flexible funding sources, still make a case for a credit line.

In summary, the option that saves you the most money depends on your condition. We discussed a few scenarios above. While there may be a few variations, it covers the most common cases. Ensure to consult a tax expert where needed.