Earning interest on your crypto holdings is a popular way to generate passive income, but it comes with tax obligations in the US. Whether you earn interest through lending platforms, DeFi protocols, or crypto savings accounts, the IRS treats this income as taxable. Let's cover how crypto interest is taxed, how to report it, and how to reduce your tax bill.
Key Takeaways
- Crypto interest is taxed as ordinary income in the US at the time you receive it.
- You must determine the Fair Market Value (in USD) of the interest at the time of receipt.
- Selling crypto earned as interest triggers a second taxable event subject to capital gains tax.
- Crypto tax software like CoinTracking can automatically track interest income and generate tax reports.
What is crypto interest?
Crypto interest refers to the rewards you earn by lending or depositing your cryptocurrency on various platforms. Similar to earning interest in a traditional savings account, crypto interest allows holders to earn passive income on their digital assets.
There are several ways to earn crypto interest:
- Centralized lending platforms – Platforms like BlockFi (now bankrupt), Celsius, and Nexo allow users to deposit crypto and earn interest.
- DeFi protocols – Decentralized finance platforms like Aave and Compound let users lend crypto directly to borrowers and earn interest.
- Crypto savings accounts – Some exchanges offer savings or earn programs where users deposit crypto and receive periodic interest payments.
- Liquidity pools – Providing liquidity to decentralized exchanges can generate yield similar to interest.
Is crypto interest taxable in the US?
Yes, crypto interest is taxable in the US. The IRS treats cryptocurrency as property, and any income earned from crypto activities, including interest, is subject to taxation.
Each time you receive interest in your account and have full control and access to that wallet, you need to report that income based on its Fair Market Value (FMV) in USD at the time you received it.
Important
Even if you do not withdraw or sell the crypto interest you earned, you still owe taxes on it at the time you receive it in your account.How is crypto interest taxed?
Income tax on crypto interest
Crypto interest is taxed as ordinary income in the US. When you receive interest payments in cryptocurrency, you must recognize the income at the Fair Market Value of the tokens at the time you received them.
The tax rate will depend on your total taxable income and filing status. Income tax rates in the US range from 10% to 37%, depending on your tax bracket.
Example
You deposit 1 BTC into a lending platform and earn 0.05 BTC in interest over the year. If the Fair Market Value of 0.05 BTC at the time you received it was $2,500, you need to report $2,500 as ordinary income on your tax return.Self-employment tax considerations
If you earn crypto interest as part of a trade or business, you may also owe self-employment tax on that income. However, for most individual investors who are simply depositing crypto into lending or savings platforms, self-employment tax typically does not apply.
Crypto interest from lending platforms
Centralized lending platforms like BlockFi, Celsius, and Nexo allowed users to deposit their crypto and earn weekly or monthly interest payments. Each interest payment is a taxable event.
You need to track the FMV of each interest payment at the time you received it. If the platform provided interest in a different token than you deposited, you still need to determine the FMV of the received tokens.
With many lending platforms going bankrupt, investors should also consider the tax implications of platform bankruptcies and potential loss deductions.
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Crypto interest from DeFi protocols
Earning interest through DeFi protocols such as Aave or Compound works differently from centralized platforms. In DeFi lending, you supply tokens to a smart contract and receive interest-bearing tokens (like aTokens or cTokens) in return.
The tax treatment of DeFi interest can be more complex:
- Receiving interest-bearing tokens – Some tax professionals argue this is a taxable event, while others view it as a non-taxable deposit.
- Accruing interest – Interest that accrues on DeFi protocols may be taxable as it accrues, or only when you withdraw and realize the gains.
- Redeeming tokens – When you withdraw your original deposit plus interest, the interest portion is taxable income.
It is important to keep detailed records of all DeFi interactions using tools like CoinTracking to properly track and report DeFi interest income.
Crypto interest from savings accounts
Several crypto exchanges and platforms offer savings or "earn" programs where users can deposit crypto and receive periodic interest payments. These interest payments are treated the same as any other crypto interest income.
You must determine the FMV of the interest at the time it is credited to your account and report it as ordinary income, even if you do not withdraw or sell the earned crypto.
How to determine the Fair Market Value of crypto interest
To properly report crypto interest income, you need to determine the Fair Market Value (FMV) of the interest at the time you received it. The FMV is the price the crypto was trading at on the open market at the moment you received the interest payment.
Steps to determine FMV:
- Identify the exact date and time you received the interest payment.
- Look up the market price of the cryptocurrency on a reputable exchange at that time.
- Multiply the amount of crypto received by the market price to determine the USD value.
- Record this amount as income for that tax period.
Crypto tax software like CoinTracking can automate this process by automatically determining the FMV at the time of each transaction.
Capital gains tax when selling crypto interest
When you eventually sell the cryptocurrency you earned as interest, you will face a second taxable event: capital gains tax.
Your cost basis for the interest income is the FMV you recognized when you received it. Your gain or loss is calculated as:
Capital Gain/Loss = Sale Price – Cost Basis (FMV at receipt)
Example
You earned 0.05 BTC in interest when BTC was worth $50,000 (cost basis = $2,500). Later, you sell that 0.05 BTC when BTC is worth $70,000 (sale proceeds = $3,500). Your capital gain is $1,000 ($3,500 – $2,500).If you held the crypto interest for more than 12 months before selling, you qualify for long-term capital gains rates (0%, 15%, or 20%). If you held for 12 months or less, short-term capital gains rates (10% to 37%) apply.
How to report crypto interest on your tax return
You need to report crypto interest income on your US Individual Income Tax Return (Form 1040):
- Interest income – Report on Schedule B (Interest and Ordinary Dividends), Part I.
- Capital gains from selling interest – Report on Form 8949 and Schedule D of Form 1040.
- Self-employment income – If applicable, report on Schedule C.
Some crypto platforms may issue a 1099-MISC form if you earned more than $600 in crypto income. However, even if you do not receive a 1099, you are still required to report all crypto interest income to the IRS.
How to reduce crypto interest taxes
While crypto interest is taxable, there are several strategies to reduce your tax bill:
- Hold before selling – Wait more than 12 months before selling crypto earned as interest to qualify for lower long-term capital gains rates.
- Tax loss harvesting – Offset interest income with capital losses from other crypto trades.
- Crypto IRAs – Invest through a self-directed IRA to defer or eliminate taxes on crypto interest.
- Donate crypto – Donate appreciated crypto to charity to receive a tax deduction.
- Track all expenses – Deduct transaction fees and platform costs associated with earning interest.
How to easily calculate crypto interest taxes
Tracking crypto interest across multiple platforms and DeFi protocols can be complex. CoinTracking simplifies this process by:
- Automatically importing transactions from over 400 exchanges and wallets.
- Determining the FMV of each interest payment at the time of receipt.
- Calculating capital gains when you sell crypto earned as interest.
- Generating IRS-ready tax reports including Form 8949 and Schedule D.
Calculate Your Crypto Interest Taxes
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Conclusion
Earning crypto interest is a great way to grow your digital asset portfolio, but it comes with tax obligations. In the US, crypto interest is taxed as ordinary income when received, and capital gains tax applies when the earned crypto is sold. Keeping accurate records of all interest payments and their FMV is essential for proper tax reporting. Use tools like CoinTracking to automate the process and ensure compliance with IRS requirements.