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Crypto Law/Level IX · Death, divorce and disputes/9.2 Family and money disputes/Lesson 5

Loans between friends

What changes when friends or family lend each other crypto, or lend cash to buy it: proving the deal, the coins-or-dollars question, US tax rules on interest, gifts and bad debts, and the deadlines for suing.

Education, not legal, tax or investment advice. Crypto law differs between countries and states and changes often. Check the current rules where you live with a qualified lawyer or tax adviser before you act.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Write a free one-page note naming the token or currency owed, the amount, network, repayment date and interest; it proves a loan rather than a gift and fixes whether repayment is in coins or dollars.
  2. Interest-free loans between individuals need no imputed interest while the total outstanding stays at $10,000 or less (26 U.S.C. §7872(c)(2)); the exception is lost if the loan funds income-producing assets.
  3. Gift loans up to $100,000 cap imputed interest at the borrower’s net investment income, treated as zero if $1,000 or less (§7872(d)(1)); above $100,000, charge at least the applicable federal rate.
  4. Forgive up to $19,000 per recipient in 2026 with no gift tax return; a worthless genuine loan is instead a short-term capital loss under §166(d), deductible against ordinary income only up to $3,000 a year.
  5. Recover cheaply in small claims: California hears claims by individuals up to $12,500, with $30 to $100 fees and no lawyers; sue within four years on a written loan or two years on an oral one.

MaterialsA written loan note naming lender, borrower, asset, amount, repayment date and interest26 U.S.C. §7872 (below-market loans) and §166(d) (nonbusiness bad debts)Your state’s limitation periods for written and oral contracts (for California, Code of Civil Procedure §§337 and 339)

Wonder

  1. If I lent a friend bitcoin and the price doubled, what do they owe me back?
  2. Does an interest-free loan to family create a tax problem?
  3. If the friend never repays, can I deduct the loss?

Explore

  1. Informal loans are a common source of disputes between friends and relatives, and crypto adds new ones. An oral loan can be a binding contract, but proving its terms years later is hard, and a transfer with no paperwork can later be described as a gift, an investment or a payment for something. Blockchain records prove that coins moved from one address to another; they do not prove why. A short note signed by both people, naming the asset, the amount, the repayment date and any interest, settles most of the questions that otherwise end up in front of a judge.
  2. The crypto-specific question is what exactly is owed: the same number of coins, or the value in money at the time of the loan. If a friend borrows 1 bitcoin and the price doubles, repaying in coins costs the borrower twice as much in dollars; if the price halves, the lender gets back half the value. Neither answer is automatic, and when the agreement is silent a court has to infer what the parties meant from their messages and conduct. A note can state plainly whether repayment is in the same quantity of a named token on a named network, or a fixed amount of a named currency.
  3. US tax law looks at the terms. Under 26 U.S.C. §7872, a below-market loan, one charging less than the applicable federal rate, can cause interest to be imputed for tax purposes. For a gift loan directly between individuals, §7872(c)(2) switches the rule off for any day on which the total outstanding loans between them do not exceed $10,000, and §7872(d)(1) caps the imputed amount for gift loans of up to $100,000 at the borrower’s net investment income. Forgiving a loan can be a gift; the US annual gift tax exclusion for 2026 is $19,000 per recipient (lesson 2.1.5).
  4. Lending the coins themselves raises a further question: whether handing over tokens in return for a promise to give back equivalent tokens is a taxable disposal. For securities loans, 26 U.S.C. §1058 provides that no gain or loss is recognised when the agreement meets its conditions, but the section applies to securities as defined in §1236(c), a definition built around stock, notes, bonds and similar instruments. That section therefore does not settle how a loan of bitcoin or another token is treated. Recording the quantities, dates and values of both the loan and the repayment makes either treatment possible to apply later (lesson 2.1.7).
  5. If the borrower never repays, a lender who is not in the business of lending may have a nonbusiness bad debt. Under 26 U.S.C. §166(d)(1), when such a debt becomes worthless during the year, the loss is treated as a loss from the sale of a capital asset held for not more than one year, so the usual limits on capital losses apply. The lender must be able to show that a genuine debt existed, with a real expectation of repayment, and that it became worthless in that year; a gift relabelled as a loan does not qualify. The written note and records of repayment demands are the evidence.
  6. Deadlines and courts limit recovery. In California, an action on a contract founded on a written instrument must generally be brought within four years (Code of Civil Procedure §337), and on an oral contract within two years (§339); other states set different periods. California’s small claims court hears claims brought by a natural person up to $12,500 (§116.221), and a judgment still has to be enforced (lesson 9.2.4). A practical check for any loan already made: write down now what was lent, when, on what terms, in which messages it was discussed, and which addresses sent and received it.

Key facts

  • Under 26 U.S.C. §7872(c)(2), the below-market loan rules do not apply to gift loans between individuals on days when total outstanding loans between them do not exceed $10,000.
  • For gift loans between individuals of up to $100,000, 26 U.S.C. §7872(d)(1) limits imputed interest to the borrower’s net investment income.
  • Under 26 U.S.C. §166(d)(1), a worthless nonbusiness debt of an individual is treated as a short-term capital loss.
  • 26 U.S.C. §1058 gives non-recognition to qualifying loans of securities as defined in §1236(c).
  • The US annual gift tax exclusion is $19,000 per recipient for both 2025 and 2026.
  • In California, actions on written contracts must generally be brought within four years and on oral contracts within two years.

Exercise nine, six, three, one

9CollectList up to 9 informal loans, in crypto or in money used to buy crypto, that you have made, received or seen among friends or family.
6ClusterSort them into 6 groups: written and repaid, written and unpaid, oral and repaid, oral and unpaid, unclear whether loan or gift, and repayable in coins rather than money.
3DistillReduce the 6 to 3 by keeping the groups that would be hardest to prove or most likely to cause a dispute.
1CrystallizeWrite 1 sentence stating the single term you would want written down for each of those 3 groups.

Fact check

Dates, figures and claims checked against the published sources listed below.

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