How to Report Crypto Interest on Taxes
Understand the tax implications of earning crypto interest from the moment of receipt to its eventual sale, including how its initial value impacts future reporting.
Earning interest on your cryptocurrency holdings creates tax obligations. The Internal Revenue Service (IRS) views crypto interest as taxable income, similar to interest earned from a traditional savings account. This income must be reported on your annual tax return. Understanding how to identify, value, and correctly report this income is required for staying compliant with federal tax laws.
Identifying and Valuing Crypto Interest Income
The first step in tax compliance is recognizing what constitutes crypto interest. Income is generated from activities like lending your crypto, earning staking rewards, and engaging in yield farming. The foundational principle for taxation is when you gain “dominion and control” over the assets. This means the income is taxable at the moment you have the ability to transfer, sell, or otherwise use the cryptocurrency you’ve earned.
To properly report this income, you must determine its Fair Market Value (FMV) in U.S. dollars at the date and time it was received. This valuation is based on the spot price of the cryptocurrency when the transaction is recorded on the blockchain. You can find this information by checking historical data on the crypto exchange you used or a price-tracking website. Each interest payment you receive is a separate income event that must be valued independently.
For example, if you received 0.1 ETH as an interest payment when the price of one ETH was $3,000, you would have $300 of ordinary income to report. Maintaining a detailed log of each payment, including the date, amount of crypto received, and its corresponding FMV in USD, is a good practice for accurate tax reporting.
Required Tax Forms and Information
All taxpayers must answer a question on their tax return about whether they engaged in any digital asset transactions during the year.
Some centralized cryptocurrency exchanges that facilitate interest-earning programs may send you a tax form. Starting with the 2025 tax year, you may begin receiving Form 1099-DA, Digital Assets, from the exchanges or platforms you use. This form is designed to report proceeds from digital asset transactions, including interest payments.
In many cases, especially with decentralized finance (DeFi) protocols, you will not receive any tax forms. The responsibility for tracking and reporting your income falls to you. You must maintain your own records for every interest payment received, including the date, the name of the cryptocurrency, the amount received, and the FMV in U.S. dollars at the time of receipt. The obligation to report all income remains whether you receive a tax form or not.
Step-by-Step Reporting on Your Tax Return
Once you have calculated your total crypto interest income for the year, you must report it on your federal tax return. You will report the total amount as “Other Income” on Schedule 1 of Form 1040. If your crypto-earning activities are considered a trade or business, you would report the income on Schedule C, Profit or Loss from Business.
The amount from your schedule is added to your other sources of income on Form 1040 to determine your total gross income. This income is taxed at your ordinary income tax rates, which are the same rates that apply to your wages or salary.
Subsequent Taxable Events
Reporting your crypto interest as ordinary income also establishes the cost basis for the newly acquired cryptocurrency. The cost basis is the FMV of the crypto on the day you received it, which is the same amount you reported as income. This concept prevents the same funds from being taxed twice.
Any future transaction involving that specific crypto is a separate taxable event. When you later sell, trade, or use the crypto to pay for goods or services, you will trigger a capital gain or loss. This gain or loss is calculated by taking the proceeds from the sale and subtracting your cost basis.
If the price of the cryptocurrency increased since you received it, you will have a capital gain. If the price decreased, you will have a capital loss. These gains and losses are reported on Form 8949, Sales and Other Dispositions of Capital Assets, and then summarized on Schedule D of your Form 1040. The tax rate applied to these capital gains depends on how long you held the asset before disposing of it.