Some of the accountants responding to this post are right-ish...for the wrong reasons.
ETH deposited to Aave is NOT loan collateral. Loan issuers remain tax owners of their collateral. Aave depositors DON'T remain tax owners of their ETH, bc Aave onlends it.
Depositing ETH into Aave nevertheless should not be a tax event, for the same reason securities loans are not tax events: because depositors can reacquire ETH on demand by redeeming their aETH, aETH is not "materially different in kind or in extent" from ETH, which is the threshold for a tax event.
Btw, because borrow fees on Aave are not interest, they generally are miscellaneous itemized deductions to individuals, and therefore are nondeductible, same as securities borrow fees.
HELP: Tax season is wrapping up and I need everyone’s take on ETH collateralization of a loan on @aave.
When you deposit your ETH as collateral, Aave makes an ETH-AETH swap. My accountant is telling me this is a taxable event. Isn’t the whole point of depositing your ETH as collateral precisely to prevent a taxable event? How the hell is this a taxable event?
Also, supplying ETH as collateral resembles pledging assets for a loan in traditional finance (e.g., a secured line of credit), which is not taxable unless the asset is sold or liquidated. If you maintain control and can redeem your ETH, no disposition takes place. Also, If AETH has no independent market value outside Aave (i.e., it’s only redeemable for ETH within the protocol), it’s not a distinct commodity, reducing the likelihood of a barter transaction.
Can someone make it make sense? How are you all treating it?
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