Earning interest on your cryptocurrency holdings can be a powerful way to grow your digital assets passively. However, just like traditional income, crypto interest is subject to taxation. Whether you're earning rewards through centralized exchanges or decentralized finance (DeFi) protocols, understanding your tax obligations is essential for staying compliant and avoiding penalties.
This comprehensive guide breaks down everything you need to know about how crypto interest is taxed in 2025. From reporting requirements to valuation methods and common misconceptions, we’ll walk you through each step to ensure you’re prepared during tax season.
What Is Crypto Interest?
When you deposit money into a savings account, the bank typically pays you interest as compensation for using your funds. In the world of cryptocurrency, a similar concept exists—many platforms offer interest rewards for holding or staking your digital assets.
Crypto interest can come from two primary sources:
- Centralized exchanges such as Coinbase or Binance that offer yield-bearing accounts.
- Decentralized finance (DeFi) protocols where users lend or stake tokens in liquidity pools.
These interest rates are often significantly higher than traditional banking products, making them attractive to investors. However, every reward received counts as taxable income under U.S. tax law.
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Is Crypto Interest Taxable?
Yes—cryptocurrency interest is taxable as ordinary income at the time you receive it.
The Internal Revenue Service (IRS) treats cryptocurrency as property. This means that when you earn interest in crypto form, you must report its fair market value in U.S. dollars at the time of receipt. That amount becomes part of your taxable income.
Later, if you sell or spend those interest rewards, any increase or decrease in value will trigger a capital gain or loss, which is reported separately.
For example:
- You earn 0.1 ETH in interest when ETH is valued at $3,000 → You report $300 as income.
- You later sell that 0.1 ETH for $3,600 → You incur a $600 capital gain.
This dual-tax treatment—once upon receipt, again upon disposal—is not double taxation. It reflects two distinct tax events: income recognition and capital gains realization.
Do You Need to Report Crypto Interest Under $600?
Absolutely. All crypto interest income must be reported, regardless of the amount.
While many centralized exchanges only issue a Form 1099-MISC for rewards exceeding $600, this threshold doesn’t exempt smaller earnings from reporting. Even if you earned just $50 in crypto interest, it’s still taxable and should appear on your tax return.
Failing to report small amounts can raise red flags if the IRS later discovers discrepancies through blockchain analysis tools or third-party reporting.
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Is Crypto Interest Reported to the IRS?
Exchanges that meet IRS reporting thresholds are required to file Form 1099-MISC with both the taxpayer and the IRS for interest income over $600. This includes rewards from lending programs, staking services, and other yield-generating activities.
However, DeFi platforms generally do not issue tax forms. Despite this, decentralized transactions are recorded on public blockchains like Ethereum—making them traceable. The IRS has previously partnered with blockchain analytics firms such as Chainalysis to identify unreported crypto activity.
Even without a 1099 form, you remain responsible for self-reporting all income derived from cryptocurrency.
How to Track the Fair Market Value of Your Crypto Interest
Accurate tax reporting depends on knowing the value of your crypto at the time you received it.
The IRS requires you to use the fair market value in USD when the interest was credited to your account. This value determines:
- Your income tax liability
- The cost basis for future capital gains calculations
If you don’t have access to real-time pricing data, manually checking historical prices via reputable sources (e.g., CoinMarketCap or CoinGecko) can help. Alternatively, specialized crypto tax software automates this process by syncing with exchanges and applying correct valuations based on transaction timestamps.
How to Report Crypto Interest on Your Tax Return
Here’s how to correctly report your crypto interest on your federal tax return:
Step 1: Report Interest Income
Crypto interest should be listed as “Other Income” on IRS Schedule 1 (Form 1040). Include the total USD value of all interest rewards received during the tax year.
Step 2: Report Capital Gains (if applicable)
If you sold, swapped, or spent any of your interest-earned crypto, you must report the transaction on Form 8949. This form calculates your capital gain or loss based on the difference between the sale price and your original cost basis (i.e., the value when you received it).
These entries flow into Form 1040, completing your tax filing process.
Many taxpayers use tax preparation software like TurboTax or work with CPAs familiar with digital assets to ensure accuracy.
Frequently Asked Questions
Do I need to report crypto interest?
Yes. All crypto interest income must be reported on your tax return—even if it’s below $600 or no 1099 form was issued.
Is stablecoin interest taxable?
Yes. Interest earned in stablecoins like USDT or DAI is taxable at the time of receipt based on its USD value.
How do I report crypto interest on TurboTax?
In TurboTax, go to the "Wages & Income" section and select “Miscellaneous Income.” Enter your total crypto interest as “Other Reportable Income.”
What tax form do I use for crypto interest?
Use Schedule 1 (Form 1040) to report crypto interest as “Other Income.” If you disposed of the assets later, also complete Form 8949 for capital gains.
What happens if I don’t report crypto interest?
Failure to report can result in penalties, interest charges, or even an audit. The IRS continues to enhance its ability to track blockchain transactions.
Can I get audited for not reporting small amounts?
Yes. While minor omissions may not trigger immediate action, consistent underreporting—even of small sums—can increase audit risk over time.
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Final Thoughts
Crypto interest offers a compelling opportunity to earn passive income—but it comes with clear tax responsibilities. Whether your rewards come from centralized platforms or DeFi protocols, transparency and accurate recordkeeping are key.
By understanding how crypto interest is taxed, tracking fair market values, and using reliable reporting methods, you can confidently navigate tax season while remaining compliant with IRS guidelines.
Remember: Just because no form was sent doesn’t mean no tax is due. Take control of your financial data early, and consider leveraging technology designed for modern crypto investors.
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