I understand that taking a credit line against Bitcoin collateral is not capital gains event because there is no sale.
However,
No, a loan is not taxable to the borrower and the repayment of principal is not taxable to the lender. Interest paid is a deductible expense for a business borrower and interest received is income to the lender.
The form of the lent property and repaid property is irrelevant; each will be valued at fair market value. (Quirks are possible if amounts borrowed and repaid don't actually match.)
- If a party, such as a company, is lent Bitcoin (BTC), sell it to pay expenses, and then pays back the loan in USD would that be a taxable event for the lender?
Yes.
- If so is there any way to avoid that-- perhaps by paying back the loan back equivalent amount of Bitcoin?
No.
- Is a Bitcoin denominated capital contribution ever not a taxable event?
A capital contribution (i.e. a transfer of property, in kind, to a company in exchange for equity in the company) of Bitcoin is usually not a taxable event until the Bitcoin is sold.
The sale is income to the company, although most closely held companies have pass through taxation, so it is taxed to the owners of the company on a pass through basis.
In a C-corporation, however, the conversion of Bitcoin to anything else would be a taxable sale of the C-corporation to which the Bitcoin was contributed upon which corporate entity level income taxes would be due.
In general, the answer for Bitcoin is generally going to be the same as the answer would be for pork bellies or bushels of wheat or barrels of oil.
