Crypto liquidation tax in Belgium: a 2026 guide

For many people, a liquidation is the scenario you hope never to face: the price of your collateral drops through the threshold, the protocol automatically sells a chunk of your BTC, ETH or SOL, and you are left with a penalty and a tax problem. Since the capital gains tax was approved by the Chamber on 3 April 2026 (retroactive from 1 January 2026), a liquidation is no longer a technical detail. It is a taxable disposal that you must report yourself, even though you never initiated the transaction.

In this guide we explain how Cryptotax handles liquidations on Aave, Compound, MakerDAO, Morpho, and on CEX perpetuals (Binance, Bybit, Kraken Futures) for tax purposes. We cover the difference between partial and full liquidations, how the liquidation penalty factors into your net capital gain, what happens when your collateral becomes worth less than your debt (bad debt), and how your timing is determined precisely under the 2026 law.

🔍 What is a liquidation technically?

In DeFi and on centralized exchanges, lending and leveraged positions always work with overcollateralisation: you deposit collateral that is worth more than what you borrow or take on as a position. The ratio between collateral and debt is called the health factor (Aave), the collateralization ratio (MakerDAO/Sky) or the margin ratio (CEX perpetuals). As soon as that ratio drops below a threshold, any user, typically an automated bot, gets the right to liquidate your position.

Concretely, a liquidation means that the protocol or the exchange:

• Automatically sells part or all of your collateral at the market price (often with slippage and with a discount for the liquidator).
• Uses the proceeds to repay your outstanding debt in full or in part.
• Withholds a liquidation penalty, typically 5% to 13% of the liquidated amount, depending on the protocol and the asset.
• Deposits any remaining balance back into your account or wallet.

Whether it is Aave selling 0.4 BTC of yours, MakerDAO draining your vault, or Binance Futures closing your ETH-USDT perpetual, the tax effect is identical: you lose economic ownership of the liquidated tokens, at a moment you did not choose yourself.

📊 Tax qualification: forced disposal under the 2026 law

Under the capital gains tax approved on 3 April 2026, every disposal of crypto counts as a taxable event, including a disposal you did not actively choose. A liquidation therefore qualifies without dispute as a disposal: the tokens leave your economic estate, the protocol or the bot receives them in your place, and the tax authorities charge the difference between your cost basis and the sale price as a capital gain or loss.

Important: the annual exemption of €10,000 also applies to liquidation gains. If your only event in 2026 is a liquidation and you realize no other gains, the first €10,000 of profit remains untaxed.

⏱️ Timing: when does the taxable event arise?

The tax authorities and Cryptotax look at the moment of the on-chain transaction that executes the liquidation, not the moment your health factor dropped below 1, and not the moment you were notified of the liquidation. In practice:

• DeFi (Aave, Compound, Morpho, MakerDAO): the timestamp of the LiquidationCall or Bite event on Ethereum, Base or Arbitrum is the official moment. Cryptotax reads this directly from the transaction logs.
• CEX perpetuals (Binance Futures, Bybit, Kraken Futures): the timestamp of the forced-close trade on the exchange. Cryptotax imports it via API or CSV.
• Partial liquidations: each individual liquidation call is a separate taxable event, with its own market price. A vault that is liquidated three times in a single day therefore produces three separate disposal lines.

For the valuation, Cryptotax uses the effective sale price recorded in the transaction, not an arbitrary spot price from CoinGecko. That is more accurate for tax purposes, because liquidations typically occur with slippage and with a discount for the liquidator, which makes the actual proceeds lower than the market price at that moment.

💸 The liquidation penalty: a cost or not?

Every lending protocol withholds a penalty on a liquidation as a reward for the liquidator and as a buffer for the protocol. On Aave that is 5% to 8% depending on the asset, on MakerDAO historically 13% (the so-called "liquidation penalty" or "stability fee buffer"), and on Compound around 7.5%. CEX perpetuals work with a liquidation fee on top of closing your position, plus possibly a contribution to the insurance fund.

For tax purposes, in a private context that penalty is not deductible as a separate cost. Belgian law provides no deduction for the transaction costs of private investors. What Cryptotax does do is net the penalty into the proceeds: if your 1 BTC is liquidated for €40,000 and the protocol withholds a €3,000 penalty, then your effective sale price for the capital gains calculation is €37,000. So you do not pay capital gains tax on proceeds you never received.

For those who qualify as a professional crypto trader, the situation is different: liquidation penalties are then deductible as a business expense, but at the same time all profits are taxed at progressive rates (up to 50%).

🕳️ Bad debt: what if your collateral becomes worth less than your debt?

In a normal liquidation, your collateral is still sufficient to cover the debt. Protocols typically liquidate between a health factor of 1.0 and 0.95. But during flash crashes, oracle errors or extreme volatility, it can happen that the collateral is insufficient to repay the full debt. The difference is called bad debt.

What happens then?

• On DeFi protocols, the bad debt is typically absorbed by the protocol treasury or by insurance mechanisms (Aave Safety Module, MakerDAO surplus buffer). For you as a user, the debt is in most cases no longer recoverable.
• On CEX perpetuals, the insurance fund takes over the residual debt. You lose your margin, but you are not in the red.
• With some protocols (older MakerDAO vaults, exotic lending markets) the debt can remain outstanding and be activated as soon as you deposit value again. Cryptotax labels that kind of position explicitly.

For tax purposes, bad debt is an unpleasant scenario for private individuals: you do realize a capital gain or loss on the liquidated piece of collateral, but the "gain" on the unpaid debt is not a deductible loss under the 2026 capital gains tax. The law explicitly provides that you can only offset losses against gains within the same calendar year. There is no carry-forward, and unrecoverable claims on DeFi protocols do not count as a crypto loss.

Concretely: if you deposited 2 BTC as collateral with a cost basis of €120,000, you borrowed €80,000 USDC, and during a crash 2 BTC are liquidated for €70,000, then:

• You realize a loss of €50,000 on the BTC (cost basis €120,000 − sale price €70,000).
• You have a debt of €10,000 that is typically absorbed in DeFi. You no longer have to repay anything, but you receive no extra tax deduction for that "written-off" debt.
• You can offset that €50,000 loss against other crypto gains in that same year 2026, but you cannot carry it forward to 2027.

🔢 Worked example: an Aave liquidation during a crash

Suppose that on 1 January 2026 you have an Aave position like this:

• Collateral: 1 BTC, cost basis €60,000 (= market value on 31/12/2025 under the step-up rule).
• Loan: 35,000 USDC at 4% interest.

In March 2026, BTC drops to €45,000. Aave liquidates 0.5 BTC at €43,500 (after slippage), with a 5% liquidation penalty of €1,087.50. The net proceeds of €20,662.50 are used to repay part of your USDC debt. The remaining 0.5 BTC stays in your collateral position.

So you realize a loss of €9,337.50 in 2026. Did you, for example, make €15,000 of ETH gains that year? Then your net taxable gain becomes €15,000 − €9,337.50 = €5,662.50, well below the €10,000 exemption, so the effective tax is 0%.

Cryptotax detects this entire cascade automatically through event parsing on Aave V3, delivers a PDF supporting document per liquidation that you can add as a supporting document with your return, and synchronizes your outstanding debt so your dashboard always shows the current position.

📈 Pre-2026 collateral: the step-up rule

If you bought crypto before 1 January 2026 and deposited it as collateral on a lending protocol, the step-up rule applies to liquidations in 2026 or later: your tax cost basis is the market value on 31 December 2025, not the original purchase price. That is favorable, you shield historical gains from tax.

Concretely: if you bought 1 BTC in 2021 for €30,000, and BTC stood at €60,000 on 31/12/2025, then your cost basis for future liquidations is €60,000. If 1 BTC is liquidated in 2026 at €70,000, you realize a gain of €10,000, not €40,000. Below the €10,000 exemption, you pay 0% tax in that case.

The step-up only applies to crypto that you can substantiate with proof of market value on 31/12/2025: a screenshot of your portfolio, a CoinGecko export or an audit trail from Cryptotax. Keep those supporting documents, they are crucial if the tax authorities later ask about the calculation.

🎯 When does it become 33% instead of 10%?

In mid-April 2026, the Ruling Commission (Dienst Voorafgaande Beslissingen, DVB) released an updated questionnaire in which leverage use and liquidation frequency are explicitly listed as red flags. A liquidation in itself is no reason to reclassify your activity as miscellaneous income (diverse inkomsten) at 33%, but a pattern of liquidations typically points to speculative behavior.

Among other things, the DVB looks at:

• Number of liquidations per year: a single one-off liquidation during a crash stays within normal management; four or more liquidations in a short time are hard to defend as "prudent asset management".
• Degree of leverage: Aave positions with a health factor structurally below 1.5, or CEX perpetuals with 10x+ leverage, are rarely accepted as private asset management.
• Reuse of collateral: looping strategies (deposit → borrow → swap → deposit → borrow ...) point to structured, professional activity.
• Speed of reaction: automated bots, MEV strategies or participation in liquidation incentives are clear indicators of professional activity.

Anyone unsure whether their liquidation history falls under 10%, 33% or even progressive rates can request an advance ruling from the DVB. Cryptotax delivers an audit export per protocol that supports your file, including the health-factor evolution, the timestamps of every liquidation call, and the exact slippage and penalty withheld at each moment.

💼 CEX liquidations: Binance, Bybit, Kraken Futures

The tax logic for liquidations on a centralized exchange is the same as for DeFi: a forced disposal of your margin resulting in a capital gain or loss. But the practical side differs on a few important points:

• Margin in stablecoins or crypto: when your margin is USDT, USDC or BUSD, a liquidation is typically a loss of almost 0% (stablecoins do not fluctuate). When your margin is in BTC, ETH or altcoins, a real gain or loss does arise.
• Funding fees: the funding fees you paid during your position are, for private individuals, just like the liquidation penalty not deductible, but Cryptotax processes them in the net PnL so you are not taxed on fictitious profit.
• Auto-deleverage and insurance fund: during extreme volatility, an exchange can close your winning position to cover losers. For tax purposes that is still an ordinary disposal, not a "force majeure" or tax-free scenario.
• CAP declaration required: liquidations on foreign CEXs must be reported in your Central Point of Contact (CAP) declaration together with the account numbers and the annual value.

Cryptotax imports futures data from Binance, Bybit and Kraken Futures via API and automatically links each liquidation to the correct tax category.

❓ FAQ

Is a liquidation the same as an ordinary sale for the tax authorities?
Yes. The Belgian capital gains tax makes no distinction between voluntary and forced disposals. Both count as a disposal, the only difference being who initiates the transaction (you versus a liquidator bot).

Can I deduct my liquidation penalty as a cost?
Not as a private investor. The penalty is netted into your proceeds, so you are not taxed on an amount you never received. Only professional traders can deduct penalties as a business expense.

What if my collateral becomes worth less than my debt (bad debt)?
On the liquidated tokens, you realize a capital gain or loss at the effective sale price. The "written-off" residual debt yields no extra deduction under the 2026 law. In DeFi, bad debt is typically absorbed by the protocol treasury, in a CEX context by the insurance fund.

Do liquidations count towards the €10,000 exemption?
Yes. The annual exemption of €10,000 applies to all realized gains combined, including liquidations. Did you have only a liquidation of €8,000 profit in 2026? Then you pay 0% tax.

Which moment is decisive for tax?
The timestamp of the on-chain transaction or the exchange trade that executes the liquidation, not the moment your health factor dropped below 1. For partial liquidations, each separate call counts as a distinct taxable event with its own price.

Does the step-up rule also apply to liquidations?
Yes. For collateral that you acquired before 1 January 2026, the tax cost basis at a later liquidation is the market value on 31/12/2025. That protects historical gains from tax.

Is my liquidation automatically recognized by Cryptotax?
Yes. We parse LiquidationCall events on Aave V2/V3, Bite/Bark events on MakerDAO/Sky, Liquidation events on Compound V2/V3 and Morpho, and forced-close trades on Binance Futures, Bybit and Kraken Futures. Per liquidation you see the realized capital gain or loss, the penalty and the impact on your outstanding debt.

✅ Try it today

Want to be sure that any liquidations are processed correctly in your Belgian return? Connect your wallets and exchange accounts and see for free how Cryptotax recognizes and classifies every liquidation call, penalty and repayment. For accountants: through the partner program you can generate an audit report per client with the full health-factor evolution and all disposal moments.

Also read our guide on borrowing and lending crypto, how to offset losses within the same calendar year, and how FIFO cost basis works for partial liquidations of a larger lot.

⚠️ Disclaimer: This article is purely informative and not individual tax advice. For specific cases, especially with large liquidations or a history of leverage use, consult a recognized Belgian tax adviser or request a ruling from the Ruling Commission (Dienst Voorafgaande Beslissingen).