Tax Law Shift Altered DeFi Borrower Behavior, Study Finds

US traders reduced activity after 2021 reporting rule, leaving collateral-backed loans exposed

A working paper by researchers at the University of Texas at Austin and the National University of Singapore has identified a behavioral shift in DeFi lending tied to US tax reporting changes. The study, which analyzed lending activity on Venus, a protocol on BNB Smart Chain, found that US-linked borrowers became 24.5% less likely to trade after the Infrastructure Investment and Jobs Act took effect on November 15, 2021.

The Infrastructure Investment and Jobs Act expanded broker reporting requirements for digital assets, signaling increased IRS visibility into crypto transactions. That regulatory signal appears to have prompted tax-sensitive borrowers to alter their trading patterns, according to the research by Lisa De Simone of the University of Texas at Austin, and Peiyi Jin and Daniel Rabetti of the National University of Singapore.

The “buy, borrow, die” strategy allows investors to defer capital-gains tax by borrowing against appreciated assets instead of selling them. In DeFi, the mechanism compresses into code: borrowers deposit volatile collateral and receive stablecoin loans, retaining upside exposure while obtaining dollar spending power. Liquidators can repay debt and claim collateral at a discount if loan-to-value ratios breach protocol limits.

The researchers analyzed 13 million transactions that became 1.36 million daily borrower observations across the study period from November 12, 2020 to July 31, 2022. They tracked borrowing on Venus, which enforces a 60% loan-to-value limit and uses a 7-day minimum duration above that threshold to classify a loan as in default.

After the 2021 law enactment, US-linked borrowers reduced trading activity, leaving collateral-backed loans outstanding longer. Borrowers holding stablecoin debt saw an additional 23% decline in trading likelihood. The extended loan duration increased exposure to price movements that could trigger liquidation.

Across all days in the study, 3% of traders experienced default as defined by the paper’s methodology. The total accumulated defaulted debt reached $133.34 million. The researchers focused on the 15 largest tokens as collateral on Venus, where $10,000 in collateral could support up to $6,000 in debt under protocol rules.

The study highlights a structural risk in DeFi lending: smart contracts cannot observe borrower intent or tax motivations. Traditional banking versions of buy-borrow-die strategies require relationship managers and negotiation. DeFi applies uniform collateral and liquidation rules to all users regardless of their behavioral response to regulatory signals.

Stablecoins enabled the tax-deferral strategy by allowing borrowers to obtain dollar spending power while retaining volatile collateral exposure. The paper’s findings suggest that regulatory announcements alone, without immediate enforcement, altered borrower behavior and extended default risk in lending pools.

Actual broker reporting requirements took effect January 1, 2025, under Form 1099-DA, with basis reporting rules added January 1, 2026. Noncustodial DeFi services currently fall outside broker reporting scope, creating a gap between traditional and decentralized lending oversight.