Wealthy Tax Strategies Spill into DeFi Lending Pools
The wealthy have long used tax strategies to minimize their capital gains liability, but now ordinary investors are adopting this approach using decentralized finance (DeFi) lending protocols.
One such strategy is known as 'Buy, Borrow, Die', where an investor purchases an asset, waits for it to appreciate in value, and then borrows against it to fund living expenses without selling the original asset.
This approach saves investors a significant amount in taxes but introduces fragile risk vulnerabilities. For example, if Ethereum's price drops, the loan-to-value (LTV) ratio may double, triggering collateral liquidation by external traders who can repay part of the loan to acquire some Ethereum at a discount.
A recent study on Venus, a DeFi lending protocol on the BNB Smart Chain, analyzed 13 million transactions and found that roughly 3% of traders defaulted under the paper's definition. The cumulative default debt exposure totals $133.34 million, with a significant portion attributed to tax-driven behavior.