I believe that technically, any conversion between crypto assets is still a taxable event. If you want to follow the (silly) rules, you have to pay taxes on your gains once you purchase something using your borrowed stablecoin.

So yes, you'd pay capital gains tax on the DAI that you've borrowed when you transfer it back to USD, but DAI is a stablecoin that's pegged to 1$ and the volumes are pretty high on many exchanges.

Once you include your exchanges fees in your cost basis, you actually lost like 30-40$, so it's a taxable event with capital gains loss.

This is more applicable to liquidity providers or things like AAVE and compound where your crypto is actually loaned out. With maker, your crypto doesn't move anywhere and isn't loaned out to anyone.

For what it's worth, if you use AAVE or Compound, you also have to declare interest income on what you've earned.

With maker, you'd be responsible for capital gains if it was liquidated because you fell below the 150% minimum ratio.

Admittedly, I am not familiar with maker I will have to go take a look.

I guess the difference between me and someone who would use these DeFi apps, is that they are using crypto as a speculative investment (which is fine, I speculate with other assets all the time). But most people do not have a significant portion of their net worth in crypto tokens. For me, it is much cheaper/easier/safer to just get a traditional loan.

Presumably the point is to avoid triggering capital gains tax with the low cost basis of your coins by borrowing someone else's coins to make purchases.

AFAIK, this isn't how MakerDAO loans are being treated right now.